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There's some support here, but upside is still strictly limited.
The British Pound rises against the Euro, Dollar and most major currencies, helped by stable financial markets and expectations for limited Bank of England cuts going forward.
Expectations for rate cuts have fallen steadily over recent days, with just 10 basis points of cuts seen over the remainder of the year, implying less than 50% chance of a cut being delivered.
In fact, economists at Britain's biggest bank, HSBC, say the Bank of England will keep interest rates unchanged at its next five meetings, up to and including March.
"Doing so would represent a hawkish surprise," says Robert Howard, a market analyst at Reuters. "BoE rate holds to April could make the pound proud."
The Pound to Euro exchange rate rises to 1.1543, putting it on the cusp of its highest level since last Tuesday's bond-induced selloff. The Pound to Dollar exchange rate meanwhile rises to fresh three-week highs at 1.3583.
In fact, the Pound is higher against all but two of its G10 peers, indicating an element of outperformance, even if gains are relatively contained. Those with outgoing GBP FX payment requirements should consider locking in a portion of their exposure at existing rates.
"The pound is doing OK for now, but it faces still challenges in the coming weeks as focus turns to the late-Autumn budget," says Matt Lewis from TopMoneyCompare.co.uk.
The rapid reduction in expectations for further rate cuts at the Bank of England in 2025 implies it is increasingly concerned about the inflation outlook, given prices continue to rise, even if the labour market is deterioirating.
HSBC's currency analysts, in their August global update, find that a long pause in the interest rate cutting cycle leaves GBP looking "cheap" at current levels.
New monthly forecasts look for GBP/USD to end the year at 1.37. However, against the euro, the pound is expected to struggle, with the bank's forecasts showing GBP/EUR is heading for 1.14.
The quiet upturn in the pound also reflects lower volatility conditions in global markets, which encourages international investors to seek out assets in countries with higher interest rates.
Given the Bank of England's base rate is the second-highest in the developed world, the pound benefits as international capital flows inward.
However, this 'carry trade' only works when volatility is low and investor confidence is high; for Sterling, the current low volatility environment we are experiencing is therefore proving supportive.
Above: GBP/USD at daily intervals.
If global volatility rises, the pound can come under pressure again. Currently markets are buoyed by expectations for numerous Federal Reserve rate cuts, but there is a risk that these expectations reverse on account of adverse U.S. data.
With this in mind, we are wary of an upside surprise in Thursday's U.S. inflation print that disappoints generous expectations for 'easier' Fed money.
"The fact that investors are already looking for a series of cuts underscores the fragility of sentiment. Confidence in the economy is shaky, and markets are relying heavily on the Fed to extend this cycle," says Nigel Green, CEO of deVere Group.
Domestic risks include the UK's ruling Labour Party, which is about to vote for a new deputy leader, and there are heightened risks that a left-wing populist in favour of expansive benefit spending and higher taxes wins.
This will make it harder for Chancellor Rachel Reeves to deliver a responsible and business-friendly budget in November.
Above: GBP/EUR at daily intervals.
If this fear grows, then UK bonds can come back under pressure and the pound could also sell off in sympathy.
"We’ve seen a mild rebound in the pound since Tuesday, with sterling recovering around half of its losses against the dollar in the past few trading sessions. Bonds have bounced back globally and the 30-year gilt yield, which earlier in the week spiked to its highest level since 1997, has dropped more than 10 basis points to back below 4.9%," says Matthew Ryan, Head of Market Strategy at Ebury.
"Yet, risks remain elevated, with the bond vigilantes likely to be circling like vultures going into the autumn budget," he warns.