The pound has rallied against nearly all major currencies as July comes to an end, yet investors remain cautious ahead of the Bank of England’s (BoE) policy update next week.

GBP/EUR is up 0.75% week-on-week, at 1.1735 at the time of writing, whilst GBP/USD is up 1.70% at 1.3937.

The pound rebounded as coronavirus cases in the UK continue to fall, and on forecasts that the Bank of England will be among the first of Developed Market central banks to hike interest rates.

Central bank policy forecasts continue to impact forex market action, reports Pound Sterling Live, with central banks nearing a rate rise offering support to their currencies.

"With the Fed demanding a stronger job market before it tapers stimulus, it suggested that the U.S. central bank may not move before its British counterpart, buoying sterling. Sterling capitalised on the setback to the dollar as GBPUSD turned positive for July and for 2021, a marked rebound from five-month lows last week," stated Joe Manimbo, Senior Analyst at Western Union Business Solutions.

Ahead of the central bank’s policy update and Monetary Policy Report next week, investor caution will likely rise. New economic forecasts will be unveiled as well as revised forward guidance on interest rate policy and quantitative easing.

"Anticipation ahead of next Thursday’s BoE meeting – also considering the recent signals of a split within the Board – could help contain sterling’s upside for now," said Asmara Jamaleh, Economist at Intesa Sanpaolo.

Over the longer-term, Jamaleh added that Sterling may have a bigger margin to gain strength against the euro as the Bank of England is set to change its policy stance ahead of the European Central Bank.

However, with economic growth moderating in the UK recently, the BoE may remain cautious in regard to the outlook.

"Recent activity data have pointed to a growth slowdown," said Nick Bennenbroek, International Economist at Wells Fargo Securities, LLC. "A downshift in economic growth and a more patient central bank would be a less favourable mix for the pound. In this scenario, the GBP/USD exchange rate might not gain much past $1.4000".