G10’s ‘surprise’ currency star could stumble as peers hike interest rates

Livestream Menu The British pound has gained against many of its peers in the year to date, though strength from earlier has begun to fade. Traders thought the Bank of England may be pushed to hike interest rates in response to an inflationary shock from the Iran war, but the central bank is now seen as more dovish than those in the euro area and the U. Sterling faces a further test from the October budget which will be closely watched for its impact on the U. K.' s growth trajectory, debt levels and borrowing costs. DXY JPY= VIDEO7:2407:24 UK PM stuck between Labour's election pledges and bond market: Analyst Squawk Box Europe The British pound has largely shrugged off another change of government and geopolitical shocks to outperform many of its peers this year, but the currency's recent weakness could be set to deepen. Sterling has gained around 1.6% against the euro year-to-date, adding 2.8% against the Swiss franc, 4.9% against the Swedish krona and 1% against the Canadian dollar. It is near-flat against the U. S. dollar over the same period and down 1.3% against the Japanese yen. The resignation of Prime Minister Keir Starmer on July 20 left Britain facing its seventh leader in 10 years, with markets watching closely whether a new administration would hold to the "fiscal rules" repeatedly emphasized . K. borrowing costs have risen under Starmer's quickly appointed successor Andy Burnham, also of the center-left Labour Party, but that has occurred in lockstep with a global government bond sell-off. Matthew Ryan, head of market strategy at financial services firm Ebury, said that a "clean and orderly transition of power" had "removed a potential banana skin and eased the perceived political risk premium attached to the pound." In a Friday note, Ryan said sterling had been "the surprise outperformer" among the G10 group of wealthy nations over the past three months, tying this to an unexpectedly resilient U. Gross domestic product grew by 0.4% in the second quarter, following 0.6% expansion in the first quarter — one of the strongest performances among advanced economies. Sunny weather and excitement around the FIFA World Cup boosted consumer spending, while business activity remained surprisingly resilient despite the volatile geopolitical backdrop. The pound also drew support at the start of the Iran conflict in April on outsized market expectations for a monetary policy response to inflation fears from the Bank of England, Jane Foley, senior FX strategist at Rabobank, told CNBC.