Sterling Eases Against Dollar But Remains On Course For Third Straight Weekly Gain

The British pound eased against the US dollar on Friday but remained on course for a third consecutive weekly gain, supported by growing investor confidence in Britain’s political outlook.

Sterling fell 0.2% to $1.345, giving back some of the strong gains recorded earlier in the week as renewed demand for the safe-haven US dollar emerged amid continued military strikes in the Middle East.

Despite Friday’s decline, the pound was still on track to gain about 0.4% for the week after rallying sharply on Wednesday. The gains followed reports that Britain’s incoming Prime Minister Andy Burnham is expected to appoint Shabana Mahmood as finance minister instead of the more left-leaning Ed Miliband.

Investors viewed the anticipated appointment as a sign that the incoming Labour government would pursue a more fiscally disciplined approach, easing earlier concerns about increased public spending.

Burnham is expected to formally assume leadership of the governing Labour Party on Friday before taking office as prime minister next Monday.

UK government bonds also strengthened during the week alongside sterling, while a weaker US dollar provided additional support for the British currency.

Analysts at UBS Wealth Management said Britain’s political transition has shifted from being a source of uncertainty to a positive driver for financial markets, with expectations of prudent fiscal management helping to strengthen investor confidence.

Against the euro, however, sterling gave up some of its recent gains, with the single currency rising 0.15% to 85.03 pence on Friday.

Even so, the euro remained on course for a fourth consecutive weekly decline against the pound, as sterling continued to benefit from greater political certainty and stronger-than-expected UK economic growth data.

ING currency strategist Francesco Pesole cautioned that sterling may now be trading above its fair value after climbing to a 13-month high against the euro.

He added that the pound could face renewed pressure if investors scale back expectations for further Bank of England interest rate hikes this year, a move that could reduce UK bond yields and weaken the currency’s appeal to investors.

Goodness Anunobi

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