The British pound strengthened against the U.S. dollar on Monday, recovering after ending the previous week slightly down. This comes ahead of crucial UK inflation
data and the Bank of England's (BoE) policy meeting later this week.
Sterling climbed by 0.5% on the day, reaching $1.3190, up from Friday's close of $1.3125.
"Sterling is holding up quite well," said Niels Christensen, chief analyst at Nordea. He noted that the consensus is that the BoE will likely adopt a more cautious stance on rate cuts, given expectations of a rise in core inflation.
The BoE is anticipated to maintain interest rates unchanged this week following a 25-basis-point cut last month. However, futures markets on Monday indicated a 38% chance of another 25-basis-point rate cut, up from 20% on Friday.
Wednesday's inflation data will be critical ahead of the BoE's policy decision, especially after recent data from the Office for National Statistics showed that the UK economy unexpectedly stagnated in July.
"The anticipated increase in the core inflation rate is one reason we don’t expect 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 given the recent weak economic data," Baur added.
Elsewhere, the European Central Bank cut interest rates by 25 basis points last week and hinted at a downward trend for borrowing costs as inflation eases and economic growth in the eurozone slows.
The pound remained flat against the euro at 84.35 pence, while the dollar weakened and the yen reached its highest level in over a year, with markets increasingly expecting a larger-than-anticipated rate cut by the U.S. Federal Reserve later this week.
