Pound Strength Drives the Move
The Euro has lost ground against the Pound in seven of the last eight trading sessions, but the move is less about a collapsing single currency and more about a stronger repricing of Sterling. The Pound has just recorded its best week in three months and reached a one-year high against the Euro, despite the United Kingdom still being in the middle of a leadership transition with no confirmed Prime Minister and no named finance minister.
BoE Hike Expectations Shift Quickly
Interest rate pricing moved sharply in favour of the Pound within only a few sessions. On Monday, markets assigned about a 70% probability to a Bank of England rate hike by year-end. By Tuesday, that had risen to 76%. After the White House declared the ceasefire with Iran over at the NATO summit in Ankara, markets moved to fully price a hike.
Energy Shock Adds to UK Inflation Risk
Fresh strikes pushed Brent crude oil to a two-week high, increasing concern that energy costs could feed into inflation. For a gas-heavy UK economy, that matters. The move gave investors another reason to believe the Bank of England may need to keep policy tighter for longer.
Domestic UK Signals Were Already Hawkish
The Bank of England had already shown a more hawkish tilt before the geopolitical shock. In June, the central bank held rates at 3.75% in a 7-2 vote, with the chief economist and an external member favouring an increase to 4.00%. That represented one more dissent than in April.
Services Inflation Keeps Pressure on the BoE
UK services inflation is running at 3.7%, compared with headline inflation of 2.8%. The Governor has ruled out near-term rate cuts, while the Monetary Policy Committee’s most hawkish external member scheduled three speaking appearances across two days this week, keeping the policy message firmly in focus.
Political Risk Fails to Weigh on Sterling
A leadership vacuum would normally create a risk premium for the currency, but Sterling has largely ignored the uncertainty. Andy Burnham remains the frontrunner to become Prime Minister, while Ed Miliband is being discussed as a possible finance minister. Markets appear reassured by signals that the next government will keep existing fiscal rules in place.
Financial Stability Report Leaves Pound Unmoved
The latest Financial Stability Report warned about equity leverage and cyber risk, but the Pound showed little reaction. For now, rate expectations and the inflation backdrop are outweighing domestic political concerns in the currency market.
ECB Message Fails to Lift the Euro
The European Central Bank has not sounded dovish. In June, it delivered its first rate hike since 2023, raising the deposit rate to 2.25%. It also lifted its 2026 inflation forecast to 3.0% because of the energy shock. Even so, the Euro has struggled to benefit from the more hawkish tone.
Hawkish Remarks Lose Market Impact
ECB officials continued to deliver firm policy messages this week. Monday’s executive board comments were notably hawkish, a traditionally dovish Governing Council member surprised markets with a firmer tone on Tuesday, and Wednesday brought another above-average hawkish signal. Still, the Euro barely responded.
Inflation Data Weakens the ECB Case
June’s flash inflation estimate cooled, reducing the urgency behind another ECB move. Markets now see the probability of a September follow-up hike as close to a coin flip. That is a major shift from the pricing seen before the June meeting, when investors had expected three additional hikes.
Eurozone Data Give Doves Support
Monday’s economic releases gave the more cautious ECB camp some support. Producer prices rose 5.9% year on year, above the 5.7% consensus, but retail sales missed expectations on the month. Sentix investor confidence improved sharply but remained negative at -3.1. With the ECB expecting eurozone growth of only 0.8% this year, markets remain sceptical about an extended hiking cycle.
Central Bank Meetings Set the Next Test
The next major decisions now fall to the central banks themselves. The ECB meets on July 23, followed by the Bank of England on July 30. The policy gap is currently near 150 basis points in favour of the Pound, after starting the year closer to 225 basis points.
Rate Differential Turns Back Toward Sterling
During spring, the interest rate cushion supporting Sterling had narrowed steadily. Over the last two weeks, however, expected policy direction has shifted back in the Pound’s favour. EUR/GBP has moved lower as that repricing has taken hold.
Crowded Positioning Creates Reversal Risk
The main risk to the trade is now crowding. A BoE hike that is fully priced leaves little room for positive surprise. The Bank of England has more space to disappoint on July 30 than the ECB has to surprise hawkishly on July 23, especially since markets have become less responsive to ECB rhetoric.
Resistance Levels to Watch
Initial resistance sits at Wednesday’s rejected spike near 0.8555. Above that, the 0.8600 round figure becomes the next level. The broader structure remains capped by the falling 50-day Exponential Moving Average near 0.8628, followed closely by the 200-day EMA around 0.8655.
Support and Market Bias
The fresh low at 0.8519 is the first support level before the 0.8500 handle. That round figure is the next major downside objective. The bias remains lower, although the daily Stochastic Relative Strength Index near 7.55 shows deeply oversold conditions and warns that short squeezes toward 0.8550 or even 0.8600 are possible.
Rallies Remain Vulnerable Below 0.8600
The broader trend, the rate differential and the recent Sterling repricing continue to point lower for EUR/GBP. Unless the rate story weakens, rebounds below 0.8600 are likely to remain selling opportunities, with 0.8500 as the next key target.
