The pound gave back some gains on Friday but remained on course for a third weekly rise as reports that Andy Burnham will choose Shabana Mahmood for finance minister supported UK assets.
Sterling slipped on July 17 but stayed near recent highs and was on track for a third straight weekly gain as investor concern over Britain's fiscal outlook continued to ease. The pound was down 0.2% at $1.345, giving back part of Wednesday's rally, while the euro rose 0.15% to 85.03 pence. Even so, sterling was still set for a 0.4% weekly rise, and the euro remained on track for a fourth consecutive weekly decline against the pound. Market sentiment improved after newspapers including the Financial Times reported that Andy Burnham was likely to choose Shabana Mahmood as finance minister rather than the more left-leaning Ed Miliband. Traders viewed the expected appointment as a sign Burnham, who is set to become leader of the governing Labour Party on Friday and prime minister next Monday, is unlikely to pursue the larger spending increases some investors had feared. Government bonds rallied alongside the pound, helped as well by a softer dollar earlier in the week. UBS Wealth Management said expectations of a fiscally prudent chancellor and an orderly leadership transition had turned UK politics from a market headwind into a tailwind. Still, ING strategist Francesco Pesole said sterling looked somewhat overvalued after reaching a 13-month high against the euro, adding that the currency could lose support if markets scaled back expectations for about 35 basis points of Bank of England rate hikes this year. The pound's pullback on Friday also came as the dollar drew safe-haven support from ongoing strikes in the Middle East.