Sterling advances ahead of economic data that could test rally

By Niket Nishant

Aug 17 (Reuters) - The pound rose on Monday as investors awaited a batch of inflation and labour market data that could put the currency's recent gains to the test.

Sterling rose 0.21% against a weaker dollar to $1.3560 after three consecutive weekly gains. It was also trading 0.06% higher at 85.50 pence per euro.

The inflation and labour market readings due later this week will be crucial to the Bank of England's interest rate outlook and could determine whether sterling can extend its recovery after a period of political turmoil in the UK. 

The currency was boosted by data last week that showed the British economy had grown unexpectedly in June thanks to the start of the men's soccer World Cup, hot weather and respite from the energy price surge.

However, a survey published on Monday showed that employers remain reluctant to hire and confidence has held near its weakest ​levels outside the COVID-19 pandemic.

"Policymakers are likely to focus on the broader trend rather than any single data point," said Derek Holt, head of capital markets economics at Scotiabank.

The relief from lower crude oil prices in June could also be temporary, given the latest flare-up in Middle East tensions. Iran called on the U.S. to ​accept defeat while President Donald Trump told Americans to prepare for continued high fuel prices.

"All the focus is back on oil prices. Households could yet interpret sticky energy prices as more permanent," Pantheon Macroeconomics economists wrote.

Traders are pricing in at least one increase to interest rates by the Bank of England this year, according to data compiled by LSEG. 

The central bank's chief economist, Huw Pill, told the ​Wall Street Journal last week ‌that stronger than expected economic growth reinforced the case for higher borrowing ​costs.

(Reporting by Niket Nishant in BengaluruEditing by David Goodman)