Pound holds gains but faces big test from UK data this week

The pound closed out last week modestly firmer against the euro, clawing back some of the ground lost in mid-July, and now sits roughly a percentage point above where it stood a year ago.

Against the US dollar, sterling reached its strongest level since early May, putting it around 10% above its five-year average.

This resilience came despite a change of prime minister, with markets typically wary of leadership shifts toward more left-leaning economic policy. So far, currency traders appear unfazed.

Sterling's recent strength has been underpinned by encouraging GDP figures, but attention now turns to a busy calendar of UK releases.

Unemployment and wage data are due first, with the jobless rate expected to edge down slightly from 4.9%. Wage growth, currently running at 3.4% excluding bonuses, will be watched closely by the Bank of England for signs of inflationary pressure building through pay demands.

UK inflation figures follow midweek. A softer reading could weigh on sterling, as investors may look to other currencies offering better returns. Retail sales and the UK's PMI business survey round out the week on Friday, offering a further gauge of economic momentum.

The euro enters the new week little changed against sterling but firmer versus the dollar, buoyed by eurozone GDP growth of 0.4% in the second quarter, a marked improvement after near-stagnation earlier in the year. Employment levels also ticked higher.

Despite this improved backdrop, the eurozone remains sensitive to any disruption in energy supplies. Germany's ZEW economic sentiment survey, covering both the domestic and broader eurozone outlook, is due this week and will offer an early read on how businesses are interpreting the recent data.

The US dollar softened broadly last week after inflation came in below forecasts at 3.4%. While that figure remains well above the Federal Reserve's target, it follows weaker-than-expected jobs data the previous week, leaving policymakers with a more complicated picture.

Minutes from the Federal Reserve's latest policy meeting are due Wednesday, though few expect any signal of imminent interest rate moves.

Separately, easing concerns over oil supply disruptions helped both sterling and the euro outperform traditional safe-haven currencies, including the dollar, yen and Swiss franc, last week.

For UK residents buying property in the UAE, or businesses managing payments in AED, the pound's current strength against the dollar is notable given the dirham's peg to the US currency—effectively making sterling more competitive in dirham terms than earlier in the year.

Anyone with a significant transfer pending may want to keep an eye on this week's UK data releases, given their potential to move GBP exchange rates in either direction.