The British pound gained ground against the U.S. dollar on Monday, recovering from a slight decline last week, as investors looked ahead to upcoming UK inflation data
and the Bank of England’s (BoE) policy meeting later this week.
Sterling rose by 0.5% to $1.3190, up from $1.3125 at Friday’s close.
“Sterling is holding up quite well,” said Niels Christensen, chief analyst at Nordea. The consensus is that the BoE may be "a little bit less aggressive" with rate cuts, given expectations of a rise in core inflation.
The BoE is largely expected to keep interest rates unchanged after last month's 25-basis-point cut. However, futures markets on Monday indicated an increased probability of another quarter-point rate cut, rising to about 38%, compared to 20% on Friday.
Wednesday’s inflation figures will be a key factor ahead of the BoE's decision. This follows last week’s data from the Office for National Statistics, which showed the UK economy unexpectedly stagnated in July.
“The anticipated rise in core inflation is one reason we don't foresee a change in the key rate,” said Volkmar Baur, FX strategist at Commerzbank. “But if core inflation doesn't rise, the BoE’s decision could become more challenging due to the recent weaker economic data,” he added.
Last week, the European Central Bank (ECB) cut rates by 25 basis points and signaled a "declining path" for borrowing costs as inflation slows and economic growth in the eurozone weakens.
The pound remained flat against the euro at 84.35 pence.
Meanwhile, the U.S. dollar weakened, and the Japanese yen reached its highest level in over a year, as markets increasingly anticipated a larger-than-expected rate cut from the Federal Reserve later this week.
