Sterling climbs to one-month high as dollar dips as markets weigh rate hikes

The pound rose to a near one-month high against the dollar and a one-year peak against the euro, driven by expectations of interest rate hikes by the Bank of England.

The pound rose on Friday to an almost one-month high ​against the dollar and a one-year peak versus the ​euro as markets mulled central banks' likely ‌response to ​the latest rise in energy prices stemming from the U.S.-Israeli war with Iran. Sterling rose to $1.345 on Friday, the highest since June 15, and was last up 0.1%.

Meanwhile the ‌euro fell to 85.18 pence, the lowest against the pound since late June 2025, before paring its losses to trade flat. Analysts have debated the reasons for the strength in sterling in recent weeks with better-than-expected growth, foreign companies purchasing UK firms, a ‌calming of political instability, and Bank of England policy all cited.

Monex Europe senior FX strategist Barry van der Laan ‌said comments late on Thursday from Bank of England chief economist Huw Pill that interest rates will have to rise were likely supporting the pound on Friday. "That message reinforced the market's view that the Bank of England still has less room to look through inflation than the Fed or the ⁠ECB," ​said Van der Laan.

Yet he ⁠added: "With no important UK data today, sterling is likely to be driven by broader dollar moves, oil prices and Middle East headlines." The International Monetary Fund ⁠this week upgraded its UK growth forecasts, predicting a 1% expansion in 2026. The outlook for Britain, a major energy importer, has ​been improved by the June U.S.-Iran deal and subsequent slide in oil prices.

The IMF said Britain would be ⁠the third-fastest growing economy in the G7 this year behind Canada and the U.S, outstripping the euro zone countries. However, oil prices have risen around 5% ⁠this ​week as the U.S. and Iran have traded strikes and the U.S. cancelled an Iranian oil trading waiver.

Brent crude was last trading roughly flat at $76 a barrel, although it remained well below April's high of $126. Former Greater Manchester mayor Andy ⁠Burnham took a big step to becoming the next prime minister on Thursday after he secured the support of the ⁠vast majority of Labour members ⁠of parliament to replace Keir Starmer.

Some analysts have said the clarity on the next leader and Burnham's commitment to the fiscal rules has helped the pound slightly, although they caution UK ‌markets could become ‌more turbulent once he starts outlining economic policies.