The pound has climbed to its highest level against the dollar (GBPUSD=X) in two and a half months, amid dollar weakness and the possibility that Boris Johnson will step down as prime minister.
It gained as much as 0.3% on Thursday to reach $1.3747, its highest since last October. Against the euro (GBPEUR=X), sterling was trading flat on the day.
The currency move comes as traders are weighing up potential resignation from the PM over attendance at a party at Downing Street during the national coronavirus lockdown.
He is facing calls to step down among his opponents and within his own Conservative party for breaking government rules to curb the spread of COVID-19.
Analysts commented that the impact on sterling would depend on whether chancellor Rishi Sunak or general secretary Liz Truss would replace the PM, with the former seen as more fiscally conservative and therefore bad for the pound.
According to some strategists, the resignation could give the currency a further lift.
“A strong and stable leadership could set the pound on a better course, though we would have to get beyond any leadership shenanigans first,” Jane Foley, a strategist at Rabobank said. “Currencies tend to like strong leaders. The politics around Johnson right now are a distraction.”
However, Neil Jones at Mizuho told Bloomberg: "Pound strength is in part a function of general dollar weakness and relative inflation expectations running parallel with potential investment money from overseas."
The dollar has received a beating in recent weeks amid bets on aggressive Federal Reserve policy tightening and rising inflation.
On Wednesday US inflation hit 7%, its highest level since 1982, and the seventh consecutive month in which it topped 5%.
Price increases in housing and used cars and trucks were the largest contributors to the inflation rate, with 0.4% and 3.5% increases in price compared with November, respectively.
Foreign exchange market traders will focus on more economic data coming from the US later today.
Analysts expect that the initial jobless claims report will indicate that 200,000 Americans filed for unemployment benefits in a week, while continuing jobless claims are projected to decline from 1.75 million to 1.73 million.
Watch: What is inflation and why is it important?