Sterling Stays Near Year-High Against Euro on Rate Hike Prospects and UK Stability
British Pound Performance and Market Influences
By Samuel Indyk
LONDON, July 15 (Reuters) - The British pound steadied against the dollar and held near its strongest level in over a year versus the euro on Wednesday, supported by expectations for higher interest rates.
Factors Supporting Sterling
Other factors supporting the currency include an easing of domestic political uncertainty, resilient growth and record inbound takeover activity for British companies.
Investors also remain optimistic that Britain can forge closer ties with the European Union, ahead of a summit next week.
Sterling's Performance Against Major Currencies
Against the euro, the pound was flat on the day at 85.28 pence, close to its strongest level since June last year of 85.09 that was hit last week.
Sterling was also little changed against the dollar at $1.3391, having risen the day before after a soft U.S. inflation print weighed on the U.S. currency.
Interest Rate Outlook
Eyes on Bank of England
The latest escalation of hostilities in the Middle East has prompted investors to add to bets for rate hikes from the Bank of England this year, given the expected impact on inflation from higher oil prices.
Market Expectations for Rate Hikes
Money market traders are fully pricing in a hike by the November policy meeting, with a second rate hike priced in by March 2027. Prior to the U.S.-Israeli war with Iran, investors had been expecting the BoE to lower interest rates twice this year.
"Relatively high interest rates are keeping sterling supported," said Chris Turner, head of global markets at ING.
"Maybe at the margin, the EU-UK summit can generate some modest sterling gains, so it's hard to call sterling lower for the time being."
Political Developments
Politics in Focus
Andy Burnham is expected to be formally announced as Labour leader on Friday and officially named as prime minister on July 20, pushing focus on to his choice of finance minister given the nation's shaky public finances.
Finance Minister and Fiscal Policy Outlook
Britain's finance minister Rachel Reeves, who is likely to be replaced next week once Burnham becomes prime minister, has stressed the need for stability in the public finances.
Betting markets now place Foreign Secretary Yvette Cooper as the current favourite, usurping Ed Miliband, who is thought to favour more expansive fiscal policy.
(Reporting by Samuel Indyk; Editing by Emelia Sithole-Matarise)
