Sterling climbed against the euro and dollar as markets reacted to reports over the incoming Treasury appointment

Sterling climbed to its strongest level in a year on Thursday as currency markets reacted to reports that Shabana Mahmood is set to become Andy Burnham's chancellor.

The pound rose 0.6 per cent against the euro, climbing above €1.18 for the first time since June 2025.

Against the US dollar, sterling gained as much as 0.8 per cent to move above $1.35.

The Home Secretary has emerged as the leading candidate to succeed Rachel Reeves at the Treasury when Mr Burnham takes office on Monday.

Energy Secretary Ed Miliband had previously been viewed as the frontrunner for Number 11 after advising Mr Burnham on economic strategy following his victory in the Makerfield by-election last month.

However, markets have reacted less positively to the prospect of Mr Miliband becoming chancellor amid concerns he could pursue a more left-leaning economic agenda.

The gains for sterling came as new figures showed Britain's economy returned to growth in May.

Gross domestic product increased by 0.1 per cent during the month, according to the Office for National Statistics, following a 0.1 per cent contraction in April, which marked the first monthly decline in eight months.

Liz McKeown, director of economic statistics at the Office for National Statistics (ONS), said: "The economy recorded robust growth in the three months to May, though the pace eased slightly as the latest two months showed a weaker picture."

The services sector drove the expansion, growing by 0.3 per cent, with computer programming, advertising and pharmaceuticals among the strongest-performing industries.

Production output fell by 0.3 per cent, while construction output declined by 0.8 per cent.

Paul Dales, chief UK economist at Capital Economics, said the figures were "not a bad welcome gift for incoming prime minister Andy Burnham".

Yael Selfin, chief economist at KPMG, said: "The recent rise in energy prices, driven by a pick-up in tensions in the Middle East, could pose a risk to the growth outlook, with financial conditions also tightening as a result."

Brent crude remains close to $85 per barrel after rising from around $72 before hostilities began in late February.

Fergus Jimenez-England, economist at the National Institute of Economic and Social Research, said: "The growth outlook is further threatened by volatile energy costs which will likely dampen economic activity in the near future."

Mr Dales said the economy had proved "more resilient" than expected but warned that higher fuel prices would continue to put pressure on household finances.

Market analysts said reports linking Ms Mahmood to the Treasury had reassured investors because of her association with Labour's fiscally conservative Blue Labour wing.

Philip Shaw, chief UK economist at Investec, said the pound's strength reflected reports of Ms Mahmood's potential appointment "soothing market fears of unduly lax fiscal policy".

Ray Attrill, head of foreign exchange strategy at National Australia Bank, said: "Mahmood being from the socially and more fiscally conservative 'Blue Labour' wing of the Labour Party is lessening prior concerns about a fiscally profligate Burnham-led Labour Government."

Jordan Rochester, strategist at Mizuho Bank, said there was "potential for a relief rally" in Government bonds if Ms Mahmood's appointment is confirmed.

He added: "We think that Mahmood would lower the tail risk of a more fiscally-lax candidate like Ed Miliband."