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Pound Sterling is holding recent gains against the Dollar and Euro ahead of a U.S. inflation print that markets expect to soften.
The Pound-to-Dollar exchange rate is trading at 1.3508 at the time of writing, effectively unchanged and holding the level Pound Sterling Live identified on Monday as the week's test.
Sterling buys €1.1709, with EUR/USD at 1.1540.
There is no UK data today, no Bank of England speaker, and a quiet political backdrop opens the door to a session determined by the Dollar and broader sentiment: every move in the Pound this session will be a Dollar story that arrives through the cross.
With this in mind, it's a big day for U.S. data: July CPI is released at 13:30 BST and the consensus is for a soft set of numbers that eases bets for a Fed rate hike next month.
"The lack of follow-through for US dollar weakness at the start of this week highlights that market participants are waiting to see if today’s US CPI report will further dampen expectations for a Fed rate hike as soon as September," says a note from MUFG Bank Ltd.
Markets expect headline inflation at 3.4% year-on-year, a tenth below June, with core also falling a tenth to 2.5%.
Economists at ING put the monthly figures at 0.1% for headline and 0.2% for core, and attribute the softening to lower gasoline prices, broadening rental deflation and soft wages.
The Dutch lender argues the bar is higher than the consensus implies, because the market has already positioned for a soft story.
On this reading, a 0.1% monthly core print or lower is what would actually move the needle, dragging September Fed hike bets away from a coin flip and toward no change.
Chris Turner, ING's lead FX analyst, says an undershoot should soften the Dollar, particularly against the procyclical currencies, and frames the immediate question as whether CPI can break DXY below its 99.40 to 100.00 range.
Collins Strikes USD-Supportive Tone
A weaker dollar would likely be accompanied by rising equity markets, a sign of falling volatility and improving sentiment, typically supportive of the pound against the euro and dollar but a headwind against the Australian and New Zealand dollars, as well as emerging market and commodity currencies.
However, a daily market note from Lloyds Bank flags comments from the Fed's Susan Collins pointing to conditions that may require tighter policy in the coming months.
"I do see the possibility that economic conditions in the coming months will require tighter policy, and I would be prepared to raise rates in that context," she said.
That is a hawkish marker landing hours before a print the market suspects will read dovishly. It does potentially skew risks towards a decent USD rally if inflation beats expectations.
Where Next for the Pound? Get the Quarterly Forecast Report
Point forecasts, highs and lows from global banking partners, out to early 2027.
What Will Drive the Pound This Week?
This week's key driver for the British pound comes on Thursday, when the Office for National Statistics publishes the preliminary reading of second-quarter GDP.
The economy is expected to have grown 1.1% year-on-year, which is a decent clip, and underscores the pound's recent solid run against most peers.
That release is the test Pound Sterling Live flagged on Monday for the Pound to Euro forecast, where the pullback from July's advance had held its support without breaking anything structural.
The question Thursday answers is whether the UK's 2026 outperformance against the eurozone is still running.
Until then, sterling has no independent catalyst, and the Pound to Dollar forecast for the session rests entirely on how the American number lands.
Oil and the Gulf a EUR Risk
Brent is trading near $89 a barrel after a volatile session between $88 and $90, according to a morning note from KBC.
The move lower came on reports that Pakistan's defence minister described the U.S. and Iran as close to an agreement, which pulled crude back from its highs.
Energy is doing some real work in the FX market: ING makes the European transmission explicit, arguing that unresolved Gulf tension is holding European natural gas above EUR 60 per megawatt hour and preventing better eurozone activity data from lifting the Euro.
That matters for GBP/EUR, if it turns out that the exchange rate is being supported by euro weakness rather than sterling strength.
Oxford Economics has raised its oil price forecast and now expects Brent to average $85 a barrel over the remainder of this year before easing back, arguing the world economy can withstand a prolonged disruption.
Where the Levels Sit
For the Pound to Dollar exchange rate, Monday's analysis put the week's task at 1.35064, the ceiling that has capped every advance since May.
Spot is now sitting on it, but there's a gravitational pull.
A soft inflation print can help the pair lift and ING's read is that a corresponding move in EUR/USD would take the pair toward last week's high at 1.1580, which is approximately what one-day straddle options are pricing.
That is a limited move by the standards of a CPI day, and it reflects thin August liquidity as much as conviction.
There is a further round of inflation and jobs data, plus the Jackson Hole symposium, before the Federal Reserve decides in mid-September.
