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The Pound is recovering against the Dollar, but there's notable event risk this week.
The Pound to Dollar exchange rate (GBP/USD) is looking to book its seventh consecutive daily gain this Monday, with the pair already 0.17% higher on the day at 1.3470.
GBP/USD is on a winning streak; it has put a four-week selloff behind it and is attempting to break above the downward-sloping trendline that has been in place since the start of July.
"In FX, GBP was the standout G10 performer last week following the hawkish BoE cut," says a note from Danske Bank. Gains for Sterling followed a 25 basis point rate cut, but it was clear the Bank might now be inclined to hold interest rates at current levels on account of rising domestic inflation.
This resulted in a repraisal of a November interest rate cut, which was a certainty ahead of the Bank of England's latest decision and guidance.
Falling rate cut bets aided GBP/USD's offensive and takes it above the nine-day exponential moving average, at 1.3389, flipping the Week Ahead Forecast model into constructive territory.
Given this, levels above 1.35 are anticipated in the coming days, ahead of a test of 1.36 in the next one-to-two weeks.
Above: GBP/USD at daily intervals.
To be sure, there's a significant risk event looming in the form of Tuesday's U.S. inflation release, as it could determine whether or not the U.S. Federal Reserve will be in a position to cut interest rates in September.
"This week, all eyes are on the U.S. July CPI print due for release tomorrow. Market focus has shifted from tariffs toward U.S. data and Fed appointments," says Danske Bank.
The CPI inflation report will be the first of two reports that will come before September's Fed meeting and risks disappointing rate cut expectations if it beats expectations.
Headline CPI is forecast at 2.8% and core at 3.0%. Anything above here would prove disappointing and risk triggering a stock market selloff as investors become fearful that the U.S. is entering a stagflationary period of low growth and high inflation.
High inflation means the Federal Reserve won't be able to step in to assist the economy with further rate cuts. It's possible that the Dollar will eventually come under pressure under such a scenario, but for now, higher inflation is deemed supportive of U.S. interest rates and therefore the Dollar.
If inflation undershoots expectations, then the stock market rally will extend and the Dollar will likely weaken, helping GBP/USD push towards 1.36.
Image courtesy of Lloyds Bank.
Also on Tuesday is the UK's labour market report, which should show a further deterioration in employment and wages.
The unemployment rate is expected to remain steady at 4.7%, but a raft of measures of employment will likely point to an ongoing softening in the market that would typically weigh on Sterling.
Surveys continue to point to deterioration, with KPMG and the REC's Report on Jobs for July was released on Monday, confirming the labour market is still suffering from the impact of higher payroll taxes and a hit to confidence.
The report, which is also monitored by the Bank of England, said starting salaries for new workers were growing at the slowest pace since March 2021, and companies reported falling demand for workers in July.
This trend should be reflected in lower salary figures on Tuesday's official ONS release.
Weakening employment and salaries would typically invoke interest rate cuts at the Bank of England, which in turn would weigh on the British Pound.
However, last week's Bank of England policy decision revealed that the Bank was increasingly concerned about the UK's above-target inflation rates, while its own inflation forecasts for the near- and medium-term were revised higher in the Monetary Policy Report.
The market's takeaway from the event was that the Bank is increasingly concerned about inflation and might be more inclined to forgo another interest rate cut this year, disappointing a market that was looking for one more 2025 cut and at least one more next year.
"As of (Thursday), it was priced as a near-certainty that the Bank rate would end 2025 at 3.75%. Now, the market is less sure, and 2y yields are 5bps higher at the time of writing," says Sandra Horsfield, an economist at Investec. "Markets have reacted accordingly, with short-term rate expectations and sterling pushing higher."
It looks as though the Bank will be increasingly focused on inflation going forward, which means Tuesday's labour and wage data would have to show a significant deterioration in order to have a lasting impact on the direction of the Pound.