Pound hits one-year high vs. euro on report Mahmood may get finance job

By Samuel Indyk

LONDON, July 15 (Reuters) - The British pound rose against both the dollar and euro on Wednesday, on expectations that Andy Burnham, who is likely to be named new Labour party leader on Friday, will pick a fiscally conservative finance minister. 

Burnham is expected to be officially named as prime minister on July 20, pushing focus on to his choice of finance minister given the nation's shaky public finances. 

The i paper reported that Home Secretary Shabana Mahmood is likely to head the finance ministry, easing some worries that Burnham could pick Ed Miliband, who is thought to favour more expansive fiscal policy. The Financial Times also reported that Mahmood was the frontrunner for the role. 

"There's a lot of nervousness about Miliband," said James Sproule, chief economist UK at Handelsbanken. 

"He's seen as being more zealous and therefore potentially less willing to listen to market concerns than other potential chancellors."

Investors remain scarred by the September 2022 mini-budget of former PM Liz Truss that sent gilt yields soaring, although few expect a repeat performance under a Burnham-led government. 

British bonds rallied after the report, with the key 10-year yield last down 2 basis points (bps) at 4.958%, outperforming European peers by around 4 to 6 bps on Wednesday. Yields move inversely to prices.

Against the euro, the pound was up 0.3% on the day at 85.05 pence, its strongest level since June last year.

Sterling was also up 0.4% against the dollar at $1.3442, extending a rise from the day before after a soft U.S. inflation print weighed on the U.S. currency.

Other factors supporting the currency in recent weeks include expectations for higher interest rates, 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. 

EYES ON BOE 

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. 

Money market traders are fully pricing in a hike by the November policy meeting, with a second rate hike priced in by April 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." 

(Reporting by Samuel Indyk, additional reporting by Harry Robertson; Editing by Emelia Sithole-Matarise, Alexandra Hudson)