Sterling set for biggest weekly jump in 12 weeks on easing political risk, soft dollar

By Samuel Indyk

LONDON, July 3 (Reuters) - The British pound was headed for its biggest weekly jump in 12 weeks against the U.S. dollar on Friday, helped by easing domestic political risk and soft U.S. labour market data. 

Sterling was up 0.1% at $1.3357, taking its weekly gain to 1.2%, its biggest weekly jump against the dollar since early April. The dollar retreated after the U.S. added fewer jobs than expected last month, cooling expectations for rate hikes from the Federal Reserve.   

British markets had shown signs of unease when Andy Burnham, the only Labour lawmaker to say he wants to replace outgoing Prime Minister Keir Starmer, gained support for a possible leadership challenge.

Burnham had previously stated that the country had to get "beyond this thing of being in hock to the bond markets", worrying some investors that thought he would abandon the government's borrowing pledges. 

But markets have taken comfort from Burnham's commitment to the country's existing fiscal rules, which include balancing day-to-day spending with tax revenues and reducing debt as a share of output.  

"There's a bit of risk premia leaving sterling and therefore the currency is strengthening," said Karl Steiner, head of analysis at SEB. 

Against the euro, the pound was down slightly at 85.73 pence. On Thursday it touched its strongest level against the single currency in a year at 85.47 pence. 

BOE IN FOCUS

Markets are still pricing in a greater chance of a rate hike than a rate cut from the Bank of England this year, despite the easing of hostilities in Iran and the slow resumption of oil supplies from the Middle East.

On Thursday, BoE rate-setter Catherine Mann said looser financial conditions since the last rate meeting in June will be a key factor in her decision on rates at the July meeting.     

In Thursday's speech, Mann said she would be ready to vote for a rate rise if higher inflation expectations in the wake of the U.S.-Iran war make it less likely that inflation will return to its 2% target.

"Mann signalled a readiness to make an 'activist' increase in the policy interest rate if H2 2026 data disappoint on inflation expectations," said Commonwealth Bank of Australia currency strategist Carol Kong, adding that sterling was underpinned by Mann's comments.

Money market futures imply around a 70% chance of a rate hike by year-end. Prior to the Middle East conflict, investors had expected the BoE to cut rates twice in 2026. 

(Reporting by Samuel Indyk; Editing by Jan Harvey)