The British pound is on track to record its biggest weekly gain against the US dollar in nearly 12 weeks, supported by easing political concerns in the United Kingdom and a weaker dollar following softer-than-expected US labor market data.

Sterling rose 0.1% to $1.3357, bringing its weekly gain to 1.2%, its strongest performance since early April. The move came as the dollar weakened after data showed the US economy created fewer jobs than expected in June, reducing market expectations for further Federal Reserve interest rate hikes.

UK markets had recently been unsettled after Andy Burnham, the only Labour Party figure to publicly declare his intention to succeed outgoing Prime Minister Keir Starmer, gained support in the leadership race.

Burnham had previously argued that Britain should move beyond what he described as an excessive reliance on bond markets, raising concerns among some investors that he could abandon the government's commitment to fiscal discipline.

However, market sentiment improved after Burnham reaffirmed his support for the current fiscal framework, including funding day-to-day spending through tax revenues and reducing public debt as a share of gross domestic product.

Karl Steiner, Head of Research at SEB, said:

A portion of the political risk premium is leaving sterling, which is helping support the currency.

Against the euro, the pound edged slightly lower to 85.73 pence after reaching its strongest level against the single currency in a year on Thursday at 85.47 pence.

Bank of England remains in focus

Markets continue to assign a higher probability to a Bank of England rate hike than a rate cut this year, despite easing tensions with Iran and the gradual recovery of oil flows from the Middle East.

Catherine Mann, a member of the Bank of Englands Monetary Policy Committee, said on Thursday that improved financial conditions since the banks June meeting would play an important role in her decision at the July policy meeting.

Mann added that she would be prepared to vote for a rate increase if higher inflation expectations following the US-Iran conflict reduced the likelihood of inflation returning to the banks 2% target.

Carol Kong, currency strategist at Commonwealth Bank of Australia, said Mann appeared willing to take a pre-emptive approach by raising rates if economic data in the second half of 2026 disappointed on the inflation front.

According to Kong, those comments provided additional support for the British pound.

Money market futures currently imply roughly a 70% probability of a Bank of England rate hike by year-end. Before the outbreak of the Middle East conflict, markets had been expecting the central bank to cut interest rates twice during 2026.