Sterling firms to three-year peak, focus on welfare bill vote

By Johann M Cherian

(Reuters) -Sterling neared a three-year high on Tuesday, aided by a broad dollar weakness, as uncertainty about the health of the U.S. economy continued to pressure the U.S. currency and forced investors to look for alternatives.

The pound edged up 0.4% to $1.378 at 1013 GMT, after logging its strongest quarterly performance since the third quarter of 2022 in the previous session. Investors were awaiting the outcome of a vote in the British parliament on a highly contested welfare bill, however, which could weigh on the pound.

Further aiding the currency's gains this year has been the cautious stance on monetary policy easing by the Bank of England, compared with others such as the European Central Bank.

Sterling was broadly steady against the euro, which traded at 85.75 pence on Tuesday, close to its highest since late April.

Back home, the focus was on a vote expected during the day on a welfare reform bill that could also test the stability of the Labour government run by Prime Minister Keir Starmer.

Starmer sharply scaled back planned welfare cuts last week after the proposed reforms, which were aimed at shrinking a ballooning benefits bill, sparked a rebellion among lawmakers in his party that sees itself as the protector of the welfare state.

"The government has already been forced to make about 4 billion pounds of concessions to get the bill through – although its passage is not guaranteed," said Chris Turner, global head of markets and regional head of research for UK and CEE at ING.

"Any failure to get the bill through could hit sterling and gilts on the view that further concessions will have to be made at a time when there is no fiscal headroom."

Global investors were scrutinising a batch of reports on business activity performance. In Britain, data showed the manufacturing sector showed some signs of turning a corner in its long slump in June and businesses pushed up their prices in June to offset higher labour costs.

Limiting gains for sterling was a drop in gilt yields. The benchmark 10-year bond yield dropped 6 basis points to 4.438%, following comments by Bank of England Governor Andrew Bailey.

The central bank chief highlighted Britain's softening labour market and said an uncertain global economic outlook had "definitely" hurt economic growth and investment intentions.

Traders anticipate that the BoE will lower borrowing costs by at least 25 basis points in September, according to data compiled by LSEG.

(Reporting by Johann M Cherian; Editing by Amanda Cooper and Alex Richardson)