Sterling Holds Firm Near January 2022 Highs

Sterling holds firm near January 2022 highs

By Amanda Cooper

LONDON (Reuters) -The pound held steady against the dollar on Wednesday, consolidating gains from the past two days, as investors felt confident enough in the fragile ceasefire between Israel and Iran to dip into more volatile assets.

Sterling has risen by 1.3% against the dollar so far this week, marking its largest three-day gain since late April. It was last flat at $1.361, near its highest since early 2022.

The pound held firm against the euro, which traded at 85.29 pence, not far off this week's two-month highs.

The pound tends to be more volatile than the euro or the yen and, as such, can often fall more sharply when investor mood turns sour. In the last 12 days, sterling has gained just 0.3%, compared with a rise of 0.6% in the value of the safe-haven Swiss franc.

On the geopolitical front on Wednesday, the ceasefire brokered by U.S. President Donald Trump between Iran and Israel appeared to be holding, a day after both countries signalled that their air war had ended.

On the macroeconomic front, surveys showed Britain's labour market was showing further signs of slowdown, which pointed to below-inflation pay growth and a fall in job vacancies, especially for graduate-level jobs.

Bank of England Governor Andrew Bailey on Tuesday said there were now signs that Britain's labour market was softening and he repeated his view that interest rates were likely to continue falling.

Money markets show traders see an 80% chance of a rate cut from the BoE in August.

BoE monetary policymaker Megan Greene, who voted to leave rates unchanged at the most recent meeting, said on Tuesday the recent increase in UK inflation could prove to be a longer-lasting plateau rather than a short-term hump, and the central bank should be wary of cutting borrowing costs.

One factor that analysts at Monex say markets are overlooking is a brewing rebellion among lawmakers of Prime Minister Keir Starmer's Labour party over his proposed reforms to the welfare system.

In what would be a major blow to Starmer a year after he won a large majority in parliament, Labour lawmakers have spearheaded an effort to kill the government's welfare plan at a vote due next week, saying it failed to provide support for disabled people and those with long-term health conditions.

"The implication is that substantial tax rises or additional borrowing would be needed come the autumn, if the government cannot pass reforms to limit spending on entitlements," Monex analysts said in a note.

"And that is not a sterling-positive dynamic if similar recent episodes are anything to go by," they said, warning of "growing downside risks" for sterling.

BoE Deputy Governor Clare Lombardelli is due to speak later on Wednesday.

(Reporting by Amanda Cooper; Editing by Aidan Lewis)