On Monday, the British pound climbed against a weakening dollar as markets pulled back some of their bets about the aggressive interest rate hikes from the US Federal Reserve.
However, the rally in sterling was capped by persistent fears of an economic recession in Britain and the ongoing political turmoil.
Sterling movements
On Thursday, the Sterling had come to $1.1761, which is a low of two years, but by 0855 GMT, the currency had climbed 0.6% to reach $1.1944, mainly because of weakness in the US dollar. The Sterling had also climbed against the euro by 0.3% to reach 84.76 pence.
The greenback declined after the US Federal Reserve officials indicated that they were not in favor of becoming more aggressive where rate hikes are concerned.
Market analysts said that the US dollar had moved to the back foot because the concerns about a 100 basis point increase receded and there was an improvement in risk appetite.
However, traders said that fears of an economic recession and the political situation in the country would continue to weigh on the pound.
Political environment
On Sunday, there was a second debate on television between the five Conservative party candidates that are vying to be the Prime Minister of Britain. They were clashing over tax policies, with the two leaders Liz Truss and Rishi Sunak, intensifying their battle over the economy.
Investors are expected to be keeping a close eye on the Financial Services Bill in the United Kingdom, as they hope that a move away from regulatory prudence would not de-stabilize any good incentives given to investors.
Later in the week, the focus will shift toward data in the UK. Jobs data is scheduled for release on Tuesday, while inflation data comes out on Wednesday.
This would provide more clues about the direction the Bank of England would take for curbing the soaring inflation. It is expected that the headline consumer price index would have accelerated to 9.2% in June year-on-year.
Bank of England moves
The situation is very tough for the Bank of England (BoE) because of the cost-of-living crisis and rising inflation in the country. It has already raised interest rates five times so far in order to rein in the soaring inflation in order to prevent it from becoming embedded in the British economy.
The week is going to be data-heavy, so traders will also be monitoring the flash PMI and retail sales figures for Britain, which could worsen fears of an economic recession. On Monday, data showed that there was a 9.3% increase in the asking prices for homes advertised for sale in Britain in the month.
This was a reduction from June numbers of 9.7%, as mortgage costs are rising sharply for those who are buying property for the first time.
They will increase even more, with the Bank of England expected to hike interest rates even further, although the magnitude of the hike has not been clarified. But, with inflation expected to hit double digits, the BoE is unlikely to hit a pause.
