While concerns over fiscal management have receded following the formation of the UK's new government, the pound remains at a juncture where the autumn budget debate and the course of fiscal discipline will determine its direction. Although a weaker dollar provided temporary support, political risk remains a key focus for the market.
The UK's new government has indicated that adherence to fiscal rules will be its policy, prompting some to believe that concerns over fiscal management have eased. However, divisions within the governing party could flare up again over the allocation of funding, and sterling continues to attract market attention.
Sterling fell to $1.3273 in late July before rising against a weaker dollar and recovering to the mid-$1.36 range. At the same time, higher oil prices and rising US long-term interest rates have supported the dollar, at times limiting sterling's upside.
Real GDP rose 0.4% quarter on quarter in the April-June quarter, in line with market expectations, as economic activity recovered, led by the services sector. Concerns over a recession are gradually receding, but growth remains subdued.
The focus ahead will be on the Bank of England's policy management. While interest rates were held at 3.75% at the July meeting, 3 of the 9 members called for a hike to 4.00%. July CPI accelerated, suggesting that the Bank is likely to maintain its vigilance over inflation.