Sterling held on to most of its overnight gains on Friday and was set for its biggest weekly rise in two months, as investors ramped up expectations the new British finance minister would unveil a more expansionary budget next month.
With growth weak in Britain, many economists and investors want to see the UK expand fiscal spending to help weather the impact of Britain's departure from the European Union at the end of last month.
On Thursday, Prime Minister Boris Johnson forced the resignation of finance minister Sajid Javid after the latter refused to sack his advisers. He was swiftly replaced by loyalist Rishi Sunak, which investors interpreted as a move to tighten Johnson's control over the Treasury and one that would pave the way for more public spending at a March budget. Javid was regarded as a fiscal hawk.
The market's conclusion is that the removal of Javid will allow Johnson to exercise more control over the finance ministry, which will likely result in a greater amount of government spending, Rabobank strategists said in a note.
"The implication is that there may be less need for the central bank to cut rates to keep the economy supported - which is clearly GBP positive," they said.
Expectations for a rate cut from the Bank of England before the end of 2021 have all but evaporated - money markets are now pricing in a full 25 basis point cut not before December 2021.
Speaking to Reuters a month before he ends his nearly seven-year term as Bank of England governor, Mark Carney said Britain was moving to address its main economic problem - weak productivity.
The pound was broadly steady on Friday to $1.3023, retaining most of its gains from Thursday's move. It had traded below $1.30 before news broke of Sunak's appointment.
On a weekly basis, the British currency is up more than 1%, its biggest weekly rise since mid-December. Against the euro the pound slipped 0.3% at 83.38 but remained within striking distance to a two-month high. Attention next week will turn back to the health of the British economy, with employment, inflation and retails sales numbers all due.
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