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GBP/EUR is underpinned by constructive technicals and Britain's elevated interest rates relative to the eurozone.
On interest rates: the war in Iran raised the price of oil and lifted inflation expectations. In response, the market sees the Bank of England raising rates, which underpins the UK's rate advantage over Europe.
It's why GBP is actually the third-best performing currency in the G10 since the start of the war.
As long as tensions remain elevated, that outperformance can continue: To be sure, the U.S. and Iran continue to talk, but the process is taking time, right now there's no real prospect of an enduring deal being reached.
In fact, headlines from the Middle East show renewed escalation with the U.S. striking targets in Iran over frustration over an inability to strike a deal.
As long as tensions remain high so too will oil prices, which will underpin inflation expectations and Britain's yield advantage. That's supportive for GBP/EUR, provided global risk sentiment remains contained.
Headline risks: ECB decision on interest rates is due on Thursday. Here, a 25 basis point interest rate rise is expected.
However, it's in the price already, meaning how the ECB guides on the prospect of future hikes will be important.
If the ECB is firm in warnings that it must raise rates again, EUR can rise.
If the ECB is open-ended on the matter, seeking optionality, that could be considered 'dovish' and weigh on EUR.
Next week the Bank of England is expected to keep interest rates on hold. However, it could signal that it will raise interest rates at the next meeting as it aims to deliver an insurance hike.
That would be supportive of GBP.
But, we'd be cautious as we think the Bank would much rather sit and wait this current inflationary cycle out.
Technicals are bullish... Even if GBP/EUR is approaching the massive 1.16 barrier.
It has not passed this level since July last year, meaning there's nearly a year of precedent standing in the way of GBP/EUR's ability to advance.
That means there's a high risk that further rallies are resisted.
Yet, the exchange rate trades above the rising 100-day moving average, and recent pullbacks have been shallow.
This ensures the next attempt of 1.16 will be done with far more favourable technical backing than has been the case in any recent attempts.
Medium-term headwind: UK politics will be a potential headache for GBP in the coming months as Andy Burnham seeks to topple Keir Starmer.
The market is taking the eventuality in its stride, so we'd caution of over-egging this risk.
We think it would require PM Burnham to make some poor fiscal calls for the market to show nerves.
