Sterling's Gains May Be Short-Lived Amid Rising Interest Rates

The British pound has defied expectations to outperform many of its peers this year. Despite another change of government and geopolitical shocks, 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 government will be able to stabilise the currency. The pound's recent weakness could be set to deepen as peers hike interest rates, potentially undermining sterling's momentum.