The British pound strengthened against the U.S. dollar on Tuesday as investors took profits following the dollar’s recent rally to its highest level in more than a year ahead of closely watched U.S. inflation data.
Sterling rose 0.24% to $1.3378, remaining just below the one-month high of $1.3452 reached on Friday, while trading broadly unchanged against the euro.
Renewed military exchanges between the United States and Iran pushed oil prices higher, a development that typically weighs on the pound because of the UK’s dependence on imported energy and the potential impact on domestic inflation.
Economists expect U.S. consumer inflation to ease to 3.8% in June from 4.0% in May, although rising geopolitical tensions have led investors to anticipate at least one Federal Reserve interest rate increase this year and two rate hikes from the Bank of England.
Despite higher energy prices, sterling has remained resilient in recent weeks, with the currency reaching its strongest trade-weighted level in a year, supported largely by continued weakness in the euro.
The euro has declined by nearly 3% over the past four months and was last trading at £0.8519, with technical analysts suggesting the currency pair will remain under pressure unless it breaks above recent resistance levels.
Investor attention is also focused on the UK’s political transition, with Andy Burnham expected to succeed Keir Starmer as prime minister on 20 July and markets closely watching his choice of finance minister.
Betting markets currently identify Energy Security Secretary Ed Miliband as the leading candidate, although his reputation for supporting higher public spending has raised concerns among gilt investors about the UK’s future fiscal position.
Reports also indicate that asset manager Rathbones has reduced its holdings of UK government bonds as a precaution against a potential market sell-off should the incoming government announce increased borrowing or higher public spending.