"The UK economy is strengthening and rates have bottomed," said Chris Iggo, chief international economist at Barclays Capital. In contrast, the dollar "has been under pressure across the board, and that should be supportive for the pound".
Against the dollar, the pound was trading at $1.6157 late on Friday, up from $1.6068 last week. It was little changed against the euro, with the single currency at 65.82p from 65.71p.
Traders are gearing up for reports this week on growth, trade and industry for indications how soon the Bank of England may raise interest rates. Evidence that economic activity is picking up pace could rekindle talk of rate rises before the end of the year, giving the pound a lift.
On Monday the Government releases a revision of second-quarter gross domestic product. Economists predict the report will show that the economy expanded 0.5 per cent in the second quarter compared with the previous three months, and grew 1.2 per cent in the year.
The trade report, due on Tuesday, is likely to show that the trade gap widened to pounds 2.2bn in June from a deficit of pounds 1.61bn in May. Separate figures are expected to show Britain's trade gap with countries outside the European Union narrowing to pounds 1.45bn in July, from pounds 1.66bn in June.
The UK reports on August industrial trends on Thursday. The previous report, released last month, indicated that manufacturers were more upbeat in July than they had been in almost two years.
Even as the economy revives, price pressures remain subdued, leaving some economists sceptical that the Bank of England will raise interest rates before next year.
"We think inflation is not going to reappear any time soon," said Tony Spence, at First Quadrant. "I'm not convinced we're in a boom period."
In the US, the Federal Reserve is expected to raise its benchmark interest rate to 5.25 per cent this week. Any signal that the rate move may not be the last will probably hurt US stocks and bonds, sapping demand for the dollar.
Still, if rates rise in the US, the target rate for overnight loans between banks will be above the Bank of England's benchmark rate for the first time since the Fed began using its rate as a benchmark for short-term lending. That renders the yield on dollar-denominated deposits more attractive than those on sterling deposits. That could cap the pound's gains.
The pound may fall against the European Union's single currency as recent suggestions that the euro region's recovery will accelerate brighten the outlook for the euro.
"There may be tough times ahead for the pound in the coming weeks" in the absence of rate rises in the UK and amid evidence of rebound in the euro-11 area, said Wolfgang Schulze, a trader at Landesbank Schleswig- Holstein. "For now, there's good news ahead" for the euro.
Bundesbank council member Ernst Welteke added to the rosy outlook, saying that the currency would rise further against the US dollar "as the end of the economic slump in Europe is in sight".Reuse content