Pound marches higher as investors focus on UK politics

LONDON, July 14 (Reuters) - The pound rose against the dollar on Tuesday as investors took profits after the U.S. currency's recent climb to more than one-year highs ahead of key U.S. inflation data later in the day, while holding steady against the euro. 

Sterling was last up 0.24% on the day at $1.3378, not far below Friday's one-month high at $1.3452.  

With the U.S. and Iran exchanging fire in the Gulf again, the oil price has shot higher this week, which is typically more negative for the pound than for the dollar, given Britain's reliance on imported energy and sticky inflation. 

U.S. consumer price inflation is expected to have risen 3.8% in June, easing from 4% in May. The latest flare-up in the Middle East has prompted investors to price in at least one Federal Reserve rate hike this year and two from the Bank of England, theoretically supporting sterling.

Little has stood in the pound's way in recent weeks. On a trade-weighted basis, sterling is at its highest in a year, driven largely by euro weakness. The euro has fallen nearly 3% over the past four months and was last down 0.1% on the day at £0.8519.

IG technical strategist Axel Rudolph said the near-term outlook for euro/sterling was bearish while it stayed below the June 2025 high of £0.8575. 

"For it to be able to bounce back, a rise above this week's high at £0.8541 needs to occur," he said.

The focus for UK markets is now on Andy Burnham, who is set to replace Keir Starmer as prime minister on July 20, and his choice of finance minister. 

Betting markets show energy security minister Ed Miliband as the current favourite. He is widely seen as fiscally expansive, a prospect that has unsettled gilt investors, already concerned about the fragility of Britain's finances. 

Asset manager Rathbones has reduced its holdings of UK government bonds to guard against a potential selloff if Burnham announces plans to increase spending or borrowing, Bloomberg News reported on Tuesday.

(Reporting by Amanda Cooper. Editing by Mark Potter)