The pound is heading towards a fourth straight week of gains, supported by renewed expectations that the Bank of England could raise interest rates and continued weakness
in the US dollar.
Sterling was trading around $1.3658 on Friday, up 0.19% on the day and close to its strongest level since February. Against the euro, the pound was broadly unchanged at 85.66 pence.
The currency's recent advance comes despite uncertainty over the Bank of England's next moves. Financial markets continue to price in at least one interest-rate increase before the end of 2026, while economists surveyed by Reuters generally expect the central bank to leave borrowing costs unchanged for the remainder of the year.
That divergence between market expectations and economists' forecasts has created a more uncertain outlook for sterling. If traders are forced to scale back their expectations for higher UK interest rates, the pound could come under renewed pressure.
For now, however, investors are focusing on signs that inflation remains too persistent for the Bank of England to rule out further tightening. UK inflation rose to 2.9% in July, while the economy also expanded more strongly than expected in June.
Brock Weimer, an investment strategy analyst at Edward Jones, said inflation remained sufficiently high to leave the central bank with room to increase rates this year. He also suggested that further increases could become necessary in 2027 if price pressures fail to ease.
Higher interest rates generally support a currency by making domestic assets more attractive to international investors, giving sterling an additional source of momentum if expectations of tighter monetary policy continue to build.
The pound has also benefited from a softer US dollar. The greenback weakened on Friday amid concerns about US Treasury efforts to stabilise bond markets and whether those measures could ultimately undermine confidence in the currency.
Recent UK economic figures, however, have offered a mixed picture.
Official data showed British retail sales declined in July, as expected, following a sharp increase in June. Separate figures showed the government recorded an unexpected budget deficit last month, with public spending rising more than anticipated.
The combination of stubborn inflation, uneven economic growth and conflicting expectations over interest rates leaves sterling vulnerable to shifts in market sentiment.
For the moment, though, the pound remains firmly on the front foot, with investors betting that persistent price pressures could force the Bank of England to keep its tightening options open.
