Sterling climbed to its highest level in nearly a month against the US dollar on Friday and also reached a one-year high against the euro, as investors assessed how central banks are likely to respond to higher energy prices resulting from the conflict between the United States and Iran.

The pound rose to $1.345, its highest level since June 15, before trimming some of its gains to trade about 0.1% higher.

Meanwhile, the euro slipped to 85.18 pence, its weakest level against sterling since late June 2025, before recovering to trade little changed.

Analysts said sterling's strength in recent weeks has been supported by several factors, including stronger-than-expected UK economic growth, increased foreign acquisitions of British companies, easing political uncertainty, and expectations surrounding Bank of England monetary policy.

Barry van der Laan, Head of FX Strategy at Monex Europe, said comments from Bank of England Chief Economist Huw Pill late on Thursday, indicating that interest rates would need to move higher, provided additional support for the British currency.

"Those remarks reinforced the market's view that the Bank of England has less room to ignore inflationary pressures than either the US Federal Reserve or the European Central Bank," he said.

However, he added that, in the absence of major UK economic data on Friday, sterling is likely to take its direction from movements in the US dollar, oil prices, and developments in the Middle East.

IMF upgrades UK growth outlook as political developments support sterling

The International Monetary Fund this week upgraded its forecast for UK economic growth, projecting the economy to expand by 1.0% in 2026.

The IMF said the outlook for the UK economy, which relies heavily on imported energy, had improved following the agreement reached between the United States and Iran in June and the subsequent decline in oil prices.

The fund also expects the UK to be the third-fastest growing economy in the G7 this year, behind Canada and the United States, outperforming the eurozone economies.

Even so, oil prices have risen around 5% this week following renewed exchanges of strikes between the United States and Iran, alongside Washington's decision to revoke a waiver that had allowed certain transactions involving Iranian oil.

Brent crude was last trading near $76 a barrel, although it remained well below the peak of $126 reached in April.

On the political front, former Greater Manchester Mayor Andy Burnham took a significant step toward becoming the UK's next prime minister after securing overwhelming backing from Labour Party members of Parliament on Thursday to succeed Keir Starmer.

Some analysts believe the clearer leadership outlook, together with Burnham's pledge to maintain fiscal discipline, has provided modest support for sterling. However, they cautioned that UK financial markets could become more volatile once he begins outlining the details of his economic agenda.