On Thursday, the Bank of England cut the base rate to 5 per cent, the lowest level since 1977. The additional boost to growth from cheaper credit will temper the effect of lower returns on money held in sterling, buoying the pound's value, analysts said.
"Reducing interest rates is likely to have a big positive effect on the economy," said Alex Blinkhorn, chief currency trader at Bank of Tokyo- Mitsubishi in Frankfurt. Any negative impact on sterling from lower interest rates "will be offset by the economy picking up more than it already has".
On Friday, the pound climbed to a one-week high of $1.6131, its strongest since 2 June.
A raft of reports this week should illustrate the benefit of earlier rate cuts to the economy and show that inflation is still benign. Producer price figures start off the week tomorrow. UK producer output prices, or prices charged at the factory gate, are expected to have risen 0.1 per cent in May from April.
Tuesday brings May's consumer price inflation report. The Bank of England cited concern that inflation would decelerate too much as the reason behind its latest rate cut. The bank needs to set rates to ensure that British inflation - measured as retail prices less mortgage interest payments - stays at an annual rate of 2.5 per cent. Inflation fell to 2.4 per cent in May and is seen falling further to 2.3 per cent in June, according to a survey of analysts' forecasts.
Wednesday's unemployment figures should show the jobless rate held at 4.5 per cent last month while wage growth stuck to a 4.8 per cent annual pace from February to April. Whether cheaper credit has lured more consumers to the high street may be revealed in Thursday's retail sales report.
While the pound rose against the dollar, it was little changed against the euro at 0.6522 on Friday and could fall lower this week on good economic news from countries using the single currency, analysts said.
Germany, Europe's largest economy, reported bigger than expected gains in industrial production and gross domestic product on Thursday. That, combined with the end of an 11-week bombing campaign in Kosovo, has lifted the euro as much as 2.9 per cent from a low of pounds 0.6382 per euro earlier this week, its lowest level since its introduction. "The outlook for sterling is to be somewhat softer as the year wears on but we may have to wait two or three months before that becomes evident," said David Brickman, an economist at PaineWebber International.
The yen rose against the dollar on Friday, ending its best week in six months, amid optimism that Japan's economy is emerging from an eight-year slump.
The Japanese Prime Minister, Keizo Obuchi, said he'll "do what I have to as soon as possible to inject life into the uplifted economy". On Friday, the government said the economy grew last quarter for the first time in more than a year. The dollar fell to Y118.13 from Y118.96 in late trading in New York.
"If you get two strong quarters out of Japan, the dollar could go to Y110," said Mark Gargano, of First Union.Reuse content