Pound Poised for Weekly Rise on Strong GDP Data

The British pound is poised to rise this week against both the dollar and the euro due to better-than-expected GDP data. The UK economy grew by 0.3% in June, surpassing market expectations and indicating resilience amid energy-price shocks. Lee Hardman, senior currency analyst at MUFG, attributes the pound's strength to 'favourable carry conditions', where investors borrow low-yielding currencies to buy higher-yielding ones like sterling.

Carry trades are particularly popular when volatility in currency markets is low, and this is currently the case. As a result, investors are favouring high-yielding currencies like the pound, which has short-dated borrowing costs among the highest in developed markets. This boost from carry trades, combined with the strong GDP data, has pushed the British currency up 0.25% on the day and week against both the dollar and euro.

The next important domestic data points for the pound are upcoming UK inflation and labour market releases, which could further impact its value.