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Pound sterling rallied against the euro in the wake of the Bank of England decision, but technicals could prove a headwind from here.
The pound-euro exchange rate jumped nearly half a per cent on Thursday in the wake of central bank decisions, reaching 1.1596, the highest level in five weeks.
The pair holds that advance on Friday, and with many markets on holiday, and the UK set for a long weekend, the levels should hold amidst declining volumes.
Gains for the pound follow the Bank of England's Thursday policy update where it left interest rates on hold and presented a number of potential outcomes for the economy based on the potential impact of the war in the Middle East.
The Bank simply doesn't know what's coming and how it will respond given the unknowns presented by the Middle East conflict that has since morphed into a 'cold' war with no signs of progress in negotiations.
But the market's takeaway from Thursday is that 1) rate cuts are now off the table in 2026 and 2) the Bank won't push back against the market's rate hike expectations: traders still see at least two, maybe three, hikes ahead.
That means the pound avoided a 'dovish' pitfall, and with the risk out the way, the pound rallied.
Interest rate expectations are therefore firmly in charge of FX markets, and the pound benefits from the UK offering one of the highest real yield in the G10.
Gains take GBP/EUR up to the almighty 1.16 level, a zone that has resisted the exchange rate's advances since July last year.
So we are talking about a multi-month barrier coming into play:
We will respect the resistance zone for now and would therefore expect pound sterling rallies to be sold into, and attempts to break 1.16 will be short-lived.
Ultimately, a turn lower back into the 1.15s should be anticipated.
For GBP/EUR to extend the rally, it must break through and record a couple of subsequent daily closes above 1.16. If it can do that, we would be on alert for a breakout that delivers fresh multi-month highs.
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Learn More →The technical barrier on the charts is encountered just one week away from when we learn the outcome of the May 07 local and regional elections in the UK, which should be disastrous for the Labour Party.
Speculation is rife in political circles about how Prime Minister Keir Starmer responds; there's also mounting speculation of him being challenged for the top post itself.
That raises the risk that political uncertainty comes into play, which numerous institutional analysts warn poses risks to the pound.
To be sure, we have been warning about the risks for some time, and the pound has soldiered on regardless, helped by Britain's interest rate advantage.
Given this, it's too soon to turn 'bearish' on pound sterling but we would urge those with upcoming payments to be acutely aware of the risks May presents.
Above: 1.16 has blocked the pound since July last year.
