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The British Pound remains top of the leaderboard for 2023 but faces two data releases this coming week in what amounts to the first real domestic test for the currency for this month.

Economic data for April will come amidst an ongoing bout of outperformance by the UK currency that saw the Pound to Euro exchange rate (GBPEUR) hit a new high for the year on Monday after it reached 1.1710.

"The GBP remains one of the best-performing currencies in G10, mainly due to the superior quality of the incoming UK data as well as the build-up of BoE rate hike expectations," says Valentin Marinov, Head of FX Research at Crédit Agricole. "The latter continues to boost the rate appeal of the GBP across the board."

Therefore, the Pound's period of outperformance would likely require the incoming data to remain on the firm side of expectations, with any downside misses in the numbers potentially prompting a pullback.

"Focus will be on the latest UK labour market data for May and the monthly GDP data for April. FX investors will want to see if the incoming data would give the GBP's flagging relative rate advantage another boost before buying the currency in the near term," says Marinov.

The UK is expected to have added 150K jobs during the three months to April when labour market figures are released on Tuesday, with the average earnings index (with bonus) expected to have increased at an inflation-boosting 6.1% in April.

UK GDP (Thursday) is meanwhile forecast to have risen 0.2% in the month of April, taking the year-on-year reading to 0.6%. A swath of industrial, manufacturing and trade data are also due for release on the day.

An undershoot in the data would potentially trigger a decline in the Pound, whereas a beat would keep the Pound elevated near current levels.

Above: GBP performance in 2023.

This coming week also sees the Federal Reserve and European Central Bank (ECB) deliver policy decisions that could trigger moves in key Sterling exchange rates.

The Pound to Dollar exchange rate (GBPUSD) firmed to above 1.25 after it rose 1.0% last week, driven in part by a softer U.S. Dollar amidst fading expectations for a U.S. Federal Reserve interest rate hike this coming Wednesday.

The market sees only a 30% chance of a hike with the consensus expecting the next hike will instead come in July as the Fed exits its predetermined rate hiking path. Although the Fed is expected to 'skip' a hike, its guidance on July and beyond could yet drive U.S. Dollar outperformance.

"Up until recently, the BoE seemed to have become one of the most hawkish central banks in G10 with investors pricing in aggressive tightening to the tune of three additional rate hikes in the coming months (at the time of writing). Following the surprise hikes from the RBA and the BoC, a hawkish central bank policy stance has become the norm, however," says Marinov.

"Potential hawkish surprises at the Fed and ECB June policy meetings could corroborate that view and thus dent the GBP’s relative rate appeal in the near term," he adds.

The ECB is expected to hike interest rates 25 basis points on Thursday and deliver guidance that another hike in July can be expected.

This could keep the Euro supported, although the ECB's ongoing communication has been clear on the need for at least two more hikes, lowering the potential for either a 'hawkish' or 'dovish' surprise on Thursday.

But some in the market are doubting whether the ECB can strike the required 'hawkish' notes to prompt any outperformance in the Euro exchange rate complex.

"The dominant focus on nominal yields may keep the EUR under pressure given softening inflation pressures and growth. The ECB is on course to finish its tightening cycle after hiking next week," says Paul Robson, Head of G10 FX Strategy for EMEA at NatWest Markets.