LONDON, July 9 (Reuters) - The pound rose on Thursday, as the dollar backed off the previous day's highs in line with a modest retreat in the oil price, leaving sterling around its highest in four weeks.
Sterling was last up 0.1% on the day at $1.34. It has risen by over 2% since hitting a seven-month low in late June, in the wake of Labour Prime Minister Keir Starmer announcing he would step down.
Britain is more dependent on energy imports than many of its neighbours, meaning UK markets are likely to be more sensitive to big swings in the oil price.
With the drop in oil since the peaks above $120 a barrel back in May, traders believe there is a far lower chance of the Bank of England raising interest rates this year than they did previously.
Money markets show traders believe there will be at least one rate hike this year from the BoE, with the chances of a second currently around 25%. A few weeks ago, as many as three were priced in at one point.
BNY said energy-driven supply shocks could prove beneficial to sterling "on the margins". The UK stock market has a number of heavyweight oil and gas shares that would benefit from a reacceleration in crude prices.
"Our flow data show that domestic purchases have been highly consistent due to positive real rates. It’s the international component that’s currently limiting sterling's potential, mostly due to concerns over potential growth and politics," BNY strategists said in a note.
Sterling has been more volatile than most other major currencies this week, in part due to heightened political uncertainty over who Andy Burnham, the UK's next likely prime minister, may pick as his finance minister.
Overnight implied volatility, a measure of trader demand for protection against sudden shifts in the value of the pound, is around 6% , second only to the euro , where overnight implied vol is at 6.5%.
The pound has been forging higher across the board over the last few weeks. The euro , which on Thursday was steady at 0.853 pounds, is around its weakest in a year against sterling, while the Japanese yen is close to its lowest in over 18 years .
Reporting by Amanda Cooper; Editing by William Maclean
Source: Reuters