Sterling hovers around two-month high as fiscal concerns ease

By Stefano Rebaudo

July 16 (Reuters) - Sterling hovered near its highest level in more than two months against the dollar, and edged lower versus the euro, as concerns over Britain's fiscal outlook faded.

Andy Burnham is expected to appoint interior minister Shabana Mahmood as finance minister when he becomes Britain's prime minister next week, rather than the more left-leaning energy minister, Ed Miliband, easing concerns about fiscal discipline. 

Britain's economy eked out minimal growth in May as the services industry expanded but other sectors shrank, suggesting fragile confidence among businesses. 

The greenback was little changed against major currencies as the impact of cooling inflation on U.S. rate expectations offset risks of a further spike in oil prices.

The pound was down 0.05% at $1.3533, after jumping 1.13% the day before to $1.3556, its highest level since May 12.

“For markets, a move away from Miliband as chancellor is likely to be seen as modestly supportive given his preference for greater fiscal expansion,” Matthew Ryan, head of market strategy at global financial services firm Ebury, said.

Andy Burnham is expected to be formally sworn in as prime minister on July 20.

Britain will need extra tax rises or spending cuts to prevent government debt spiralling higher from current levels, the Office for Budget Responsibility said last week. 

“Stronger trend productivity growth would enable the economy to grow somewhat faster before inflation begins to take off and makes it easier to generate sufficient tax revenue to fund public spending,” Andrew Wishart, UK economist at Berenberg, said.

“We don’t think that the policies new Prime Minister Andy Burnham has proposed so far will make much of a difference to the UK’s long-term growth prospects, but he might get lucky,” he added.

Wishart argued that the UK economy is not out of the woods, but a combination of resilient growth and flatlining employment implies that the pickup in productivity growth seen in 2025 has continued into 2026.

The euro rose 0.13% to 84.79 pence after falling 0.72% on Wednesday to 84.55 pence, the lowest level since June 10.

(reporting by Stefano Rebaudo; editing by Sharon Singleton)