Sterling rose on Monday after Andrea Leadsom, one of the two candidates from the ruling Conservative Party to succeed Prime Minister David Cameron withdrew from the contest, leaving interior minister Theresa May to take over the top job.
Traders said her decision would ease some of the political uncertainty that has hit the currency in the past few weeks and provide a bit of relief.
Sterling rose 0.4 percent to hit a day's high of $1.3020, having traded at $1.2865 before rumours that Leadsom might withdraw from the contest hit the market. It was last trading at $1.2970, still 0.15 percent higher on the day. The euro was down 0.3 percent at 84.95 pence.
"There is a bit more political clarity which is giving sterling a bit of a boost," said John Hardy, head of currency strategy at Saxo Bank. "We should see a fair bit of resistance around the $1.30 area."
The chairman of a party committee running the leadership contest said that May, who was in the "Remain" camp during the Brexit campaign, is the only remaining candidate to be the new leader of the ruling Conservative Party and a formal process will now take place to confirm her in the role.
Once confirmed as Conservative leader, May will automatically become prime minister.
Earlier, sterling was hovering just above last week's 31-year low against the dollar on expectations that the Bank of England will ease monetary policy in response to Britain's shock vote to leave the European Union.
The BoE, which meets on Thursday, expects the economy to suffer a material slowdown because of the uncertainty caused by the Brexit vote. Chances of the Bank cutting rates this week have jumped to 74 percent, from 11 percent just before the result of the June 23 referendum was announced.
The BoE has kept its main interest rate at 0.5 percent for nearly 90 months.
"We expect the BoE to cut rates by 25 basis points on Thursday, which should keep sterling offered," said Hans Redekar, head of currency strategy at Morgan Stanley.
There are clear signs that the economy needs a boost.
According to three surveys released on Monday, British consumer spending fell last month, the business outlook darkened by the most in four years and economic activity in London slowed sharply.