Last week was relatively uneventful by 2026 standards, but that did not stop Sterling from continuing its recent recovery.
GBP/USD finished the week around 1.3533 as renewed Dollar weakness helped push the pair higher, while the Pound also continued to perform well against several of its other major counterparts.
Part of that move has come from what hasn’t happened. We have seen no major deterioration in the situation between the United States and Iran, energy markets have remained relatively contained, and there have been few genuine geopolitical shocks so far this month. After spending much of the year reacting to conflict, oil prices and rapidly changing political headlines, August has so far provided a more supportive environment for risk.
That matters for Sterling.
When geopolitical uncertainty eases, some of the defensive demand for the US Dollar naturally disappears, while currencies such as the Pound tend to benefit from improving risk sentiment. Add in the fact that UK interest rates remain relatively attractive compared with several other major economies, and it helps explain why Sterling has quietly regained momentum.
The question now is whether the economic data can justify it.
This week’s calendar is heavily focused on the UK, with employment, inflation and retail sales all due over the coming days. After Sterling’s recent gains, weaker-than-expected numbers could provide markets with a reason to take some profit, while another resilient set of figures could give the Pound further room to run.
Tuesday: The UK labour market comes first
Monday’s calendar is relatively quiet, meaning the first major test for Sterling arrives on Tuesday with the latest UK employment report.
Average earnings, employment change and the unemployment rate will all be closely watched. The labour market has become particularly important for the Bank of England because wage growth remains one of the clearest indicators of underlying domestic inflationary pressure.
Markets are currently expecting the numbers to remain relatively steady. If that proves correct, it should provide some support for Sterling and reinforce the idea that the UK economy is holding up reasonably well despite restrictive monetary policy.
However, after the Pound’s recent ascent, the risks are arguably asymmetric. A strong report may simply confirm what markets are already expecting, whereas an unexpected deterioration in employment or wages could give traders a reason to question Sterling’s recent strength.
Elsewhere, Germany and the wider Eurozone release their latest ZEW Economic Sentiment surveys. Expectations are for an improvement from last month’s readings, which could provide some support for the Euro if confidence continues to recover.
Wednesday: Inflation takes centre stage
Wednesday brings arguably the most important UK release of the week with the latest inflation report. The ONS has confirmed that the July CPI figures will be released on 19 August.
Core inflation is expected to ease slightly to around 2.5%, while headline inflation is forecast to remain closer to 3%. Producer prices will also be watched for evidence of whether higher input and energy costs are continuing to work their way through the economy.
On the surface, easing core inflation would be welcome news. However, I don’t think one softer reading fundamentally changes the outlook for the Bank of England.
Energy remains the key risk. Germany’s latest inflation figures provide a good example of what policymakers are worried about, with German inflation accelerating to 2.8% in July as energy prices remained a major driver. The UK could face similar pressures as we move towards autumn and winter, when household energy consumption begins to rise again.
That means Wednesday’s inflation report needs to be viewed as part of a wider trend rather than in isolation. A softer number could initially weigh on Sterling if markets reduce expectations for further BoE tightening, but unless inflation falls substantially faster than anticipated, the Bank is unlikely to declare victory just yet.
Friday: Can the UK consumer surprise again?
The final major test for Sterling comes on Friday with July retail sales.
Current expectations point towards a monthly contraction of around 0.3%, which would represent a notable deterioration from the previous reading.
I’m not completely convinced the number has to be that weak.
July brought better weather, summer travel, the school holiday period and additional consumer activity surrounding the World Cup, all of which could have supported spending during the month. A positive surprise would add another piece of evidence that the UK economy remains more resilient than expected and could provide Sterling with another boost heading into the weekend.
Conversely, a contraction in line with, or worse than, expectations would be more difficult to dismiss. Weak consumer spending alongside any deterioration in Tuesday’s employment figures would begin to challenge the relatively constructive UK story that has helped support the Pound recently.
The Bigger Picture
The main question this week is whether the UK data can back up Sterling’s recent move higher.
GBP/USD is back above 1.35 and the Pound has benefited from a weaker Dollar and a relatively calmer geopolitical backdrop. That has given Sterling some breathing room, but after the move we’ve already seen, I think we now need to see some decent UK numbers if it is going to push much further.
Employment will be the first test on Tuesday. If wages and the labour market continue to hold up, that should be supportive for the Pound. Wednesday’s inflation data is probably more important from a Bank of England perspective, particularly with markets trying to work out whether rates have peaked or whether inflation could force the Bank to remain cautious for longer.
Then we finish the week with retail sales. The market is expecting a 0.3% monthly decline, but given the weather, summer spending and the World Cup, I wouldn’t be surprised to see that number come in slightly better than expected.
Put together, it makes this a fairly important week for Sterling. If the data is broadly positive, there is no obvious reason why the recent momentum cannot continue, especially if the Dollar remains under pressure. On the other hand, a poor employment number followed by softer inflation and weak retail sales would probably be enough to take some of the steam out of the recent rally.
Geopolitics is still the obvious wildcard. The lack of any major escalation between the U.S. and Iran has been helpful for risk sentiment, but we’ve seen enough this year to know how quickly that situation can change.
Assuming things remain relatively calm, though, this week should be much more about the UK economy than geopolitics. Sterling has had a good run. We’ll now find out whether the data is strong enough to keep it going.
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