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Pound sterling turns higher against the euro as bond yield differentials reassert their grip on direction.

Pound-euro's daily candle flips green as the pair rises to 1.1475, up from a session low at 1.1448 and a 24-hour trough at 1.1385, confirming buyers are winning out despite a very volatile geopolitical news backdrop.

A renewed focus on bond yields appears to be driving the rebound: UK government bond yields have lifted relative to their European counterparts, reasserting influence over the exchange rate after a period in which global equity sentiment dominated price action.

The two-year bond yield is particularly significant in this context. As the maturity most closely aligned with expectations for central bank policy, it acts as a barometer of how far markets believe the Bank of England will cut rates.

When the UK two-year yield rises, it typically reflects expectations that rates will not fall as far as previously assumed.

Kathleen Brooks, analyst at XTB says the pound "is one of the more resilient currencies... as higher yields and a reduction in BOE rate cut expectations for this year bolster the pound."

Pound Sterling Live

Of particular relevance to pound-euro is the spread between UK and German two-year yields.

That differential had been narrowing steadily since January last year as investors concluded that the European Central Bank was nearing the end of its easing cycle while the Bank of England still had further cuts ahead.

The compression in that yield gap dragged GBP/EUR lower through 2025 and into early 2026.

Now the trend may be shifting as rising global energy prices linked to tensions in the Middle East have left both the UK and Europe exposed, but the policy implications are not identical.

Markets are starting to reassess how much further the Bank of England can ease if energy-driven inflation pressures re-emerge. The market had been betting on a rate cut this March as recently as last week, but surging gas and oil prices warn of a potential rebound in inflationary pressures, which means the Bank won't be able to lower rates.

As a result, the UK-German two-year yield spread has begun to widen again, lending support to the pound. 

Earlier, we reported that global equity sentiment appeared to exert a stronger grip on GBP/EUR, with risk-on and risk-off swings mapping closely onto the pair's movements. However, a down day for the U.S. S&P 500 alongside gains in GBP/EUR indicates that equity influence may be loosening and interest rates reasserting.

Bond markets are regaining primacy in determining direction.