In a turnaround from the life-time lows the pound plunged to on Monday, and helped by emergency Bank of England bond buying, the UK currency was headed for its biggest weekly rise since the end of 2020 ahead of a scheduled meeting between British Prime Minister Liz Truss and the country's fiscal watchdog.

Truss, finance minister Kwasi Kwarteng and the head of the the Office for Budget Responsibility (OBR) are due to discuss the budget forecast process later on Friday.

The OBR's involvement is "alleviating fears within the markets of the so-far uncosted fiscal package, helping support GBP," said Tapas Strickland, head of market economics at National Australia Bank.

Chris Turner, head of markets at ING said the government was not yet out of the woods.

It "still has to find a way to balance the books and avoid a very negative assessment from the rating agencies," Turner said.

"A Conservative party conference this weekend suggests it is far too early for a U-turn on fiscal policy and, combined with a very difficult external environment, sterling should stay vulnerable," he added.

The UK currency rose to a fresh one-week high at $1.1235 against the U.S. dollar in early London trading, taking it very close to erasing all of the precipitous losses in the aftermath of the new government's tax cuts plans announced last Friday.

Sterling was 0.6% higher against the dollar at $1.1182 at 0910 GMT, after plumbing a record low of $1.0327 on Monday. Versus the euro, it rose to one week high and was last up 0.67% to 87.80 pence.

"The recovery in cable is very eye-catching," said Sean Callow, a strategist at Westpac in Sydney.

"It makes some sense in that UK yields are set to be high for some time, discouraging short positions. But with the UK already running very large current account deficits, we doubt there is much more upside in sterling."

BOE INTERVENTION

On Thursday, the British pound jumped 2.13% as the Bank of England (BoE) conducted a second day of bond buying to stabilise markets, sending gilt yields higher. [GB/]

Truss vowed to stick with the controversial plans on Thursday, in her first comments since the turmoil erupted in markets.

For the BoE, traders predict a 125 basis points hike to interest rates at its next meeting in early November.

In another sign of the slowdown in the market caused by the cost-of-living squeeze and rising interest rates, British house prices failed to rise in monthly terms for the first time since July 2021, mortgage lender Nationwide said on Friday.

But British lenders approved many more mortgages than expected in August.

Data on Friday showed Britain's economy unexpectedly grew in the second quarter but was below its pre-pandemic peak, contrary to an earlier estimate that it had recovered.

Another indicator, released by the Recruitment & Employment Confederation (REC), showed British job vacancies dropped to the lowest level since the COVID-19 pandemic last week, in a sign of a further weakening in the labour market.

(Reporting by Joice Alves and Kevin Buckland; Editing by Frank Jack Danie)

By Joice Alves and Kevin Buckland