Sterling Surges Amid Dollar Weakness and Welfare Vote Spotlight

Sterling neared its highest level in three years on Tuesday, bolstered by a weakening dollar as investors expressed concerns over the U.S. economy's health. The pound increased by 0.4% to reach $1.378, following its strongest quarterly performance since late 2022. The rise was in anticipation of the British parliament's vote on a contentious welfare reform bill that holds potential implications for Sterling's trajectory.

The cautious approach of the Bank of England towards monetary policy easing has further supported Sterling, distinguishing it from other central banks like the European Central Bank. The currency held steady against the euro, trading at 85.75 pence, its highest since April. The proposed vote on the welfare bill could test the strength of Prime Minister Keir Starmer's Labour government.

Prime Minister Starmer had scaled back planned welfare cuts after backlash from lawmakers, emphasizing the Labour party's commitment to the welfare state. Yet, 4 billion pounds in concessions had been pledged to advance the bill. Any failure in passing the bill might adversely impact Sterling and gilts, with analysts cautioning against the lack of fiscal latitude. Meanwhile, data showed signs of recovery in the UK's manufacturing sector while lower gilt yields limited Sterling's gains.

(With inputs from agencies.)