The cost to hedge against swings in the British pound has risen to its highest level in nearly three months, as traders await the Bank of England's interest rate decision on Thursday and a by-election that could trigger a move to oust Prime Minister Keir Starmer.

The overnight volatility rate for sterling climbed to 13.72%, marking its highest point since late March. Bolstered by better-than-expected UK labor market data for May, the pound gained 0.2% against the US dollar to approximately 1.33 in early London trading.

While markets anticipate the central bank will hold rates steady in its midday decision, as the inflationary threat from rising oil prices recedes, expectations are fully priced in for a 25-basis-point hike before year-end and the possibility of a further increase.

Traders are bracing for potential political turbulence, with the result of the by-election in the northern English constituency of Macefield expected to be announced early Friday local time. Andy Burnham, a rival to Starmer within the Labour Party, is widely favored to win the contest.