Markets have raised their bets on rate hikes around the world as the U.S.-Iran conflict has again pushed up energy prices, with traders now fully pricing in a Bank of England rate hike by the end of the year and another by March.
Mark Haefele, UBS Global Wealth Management chief investment officer, said sterling looks attractive in a note to clients on Thursday.
"We... continue to view sterling positively, supported by improving confidence in UK assets, a more fiscally credible political backdrop, and the potential for investors to reduce still substantial short positions."
He added that higher yields on UK bonds also boost the appeal of the pound.
Sterling has risen very slightly this year against the dollar, while the euro has fallen more than 1%, supported by some signs that the UK economy is faring better than expected.
Yen strength, oil prices and bond yields
Yet a jump in the yen — which analysts said reflected rising Bank of Japan rate hike bets, although they remained alert to the risk of official intervention — caused the dollar to fall across the board on Thursday.
Meanwhile oil prices slipped from a more than one-month high after a calmer day in the Middle East, helping Brent crude LCOc1 fall 1% to $95 a barrel.
The pound was little changed against the euro EURGBP=D3, with the euro zone's currency buying 85.93 pence.
A selloff in global bond markets which pushed Britain's benchmark 10-year yield GB10YT=RR to its highest level since 2007 on Wednesday abated on Thursday, with the yield down more than 3 basis points.
The jump in yields, a proxy for government borrowing costs, has eroded some of the government's so-called headroom against its fiscal rules, a headache for new Prime Minister Andy Burnham as his finance minister John Healey prepares to present a budget in October.
Sterling edges higher after prior session low
LONDON, Sept 3 (Reuters) - The pound rose slightly on Thursday after hitting a three-week low the previous day, getting a lift from a sharp rally in the yen that knocked the U.S. dollar as well as a calming of oil prices.
Sterling GBP=D3 climbed 0.1% to $1.35, having fallen to a three-week low of $1.348 in the previous session as the safe-haven dollar rose following renewed strikes between the U.S. and Iran.
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