Following three straight weeks of gains, the British currency capitalized on a softer U.S. dollar to reach $1.3560, up 0.21%. Sterling also advanced 0.06% against the euro, settling at 85.50 pence.
The upcoming inflation and employment figures will be closely watched for signs of whether price pressures remain persistent and whether the labour market is strong enough to support further monetary tightening. The readings could determine whether the pound is able to sustain its recent recovery following a period of political uncertainty in Britain.
Sterling received a boost last week after official data showed that the UK economy expanded unexpectedly in June. The stronger performance was attributed partly to the start of the men’s soccer World Cup, unusually warm weather and some relief from the earlier surge in energy prices.
However, concerns over the labour market remain. A survey released on Monday indicated that employers continue to show reluctance to hire, while business confidence has remained close to its weakest level outside the COVID-19 pandemic.
Derek Holt, head of capital markets economics at Scotiabank, said policymakers would be looking beyond individual economic indicators when assessing the outlook for interest rates.
“Policymakers are likely to focus on the broader trend rather than any single data point,” Holt said.
The outlook for energy prices has also returned to the spotlight as renewed tensions in the Middle East threaten to reverse some of the relief consumers experienced from lower crude prices in June.
Iran has urged the United States to accept defeat, while US President Donald Trump warned Americans to prepare for continued high fuel prices. Any renewed increase in energy costs could add to inflationary pressures and complicate the Bank of England’s efforts to bring inflation under control.
“All the focus is back on oil prices. Households could yet interpret sticky energy prices as more permanent,” economists at Pantheon Macroeconomics wrote.
The prospect of higher borrowing costs has already been reflected in financial markets. Traders are currently pricing in at least one Bank of England interest-rate increase before the end of the year, according to data compiled by LSEG.
The central bank’s chief economist, Huw Pill, also strengthened expectations for tighter monetary policy after telling the Wall Street Journal last week that stronger-than-expected economic growth had reinforced the case for higher borrowing costs.
Investors will therefore be watching this week’s inflation and labour market figures for confirmation of whether the UK economy can maintain its recent momentum without reigniting price pressures.
A stronger-than-expected set of figures could bolster expectations for higher interest rates and provide further support for sterling, while weaker data could revive speculation that the central bank may have less room to tighten policy.
With the pound already enjoying a three-week run of gains, the latest economic figures could prove decisive in determining whether the currency’s recovery has further room to run.