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Pound sterling breaks through key level against the euro and reaches highest since August.
The pound-to-euro exchange rate has risen to 1.1611, a level last seen on August 27, in midweek trade as a potentially significant technical move gets underway.
The pair has long been hemmed in by the massive layers of selling interest that are clustered around 1.16, ensuring it has become a hard-and-fast barrier to progress higher.
No less than seven attempts at a breakthrough have been made since last August, and none of stuck; indeed, this one might yet fail.
However, there's a sense that there's a good chance of a breakthrough here: Tuesday's close at 1.1600 was a signal that the sellers were losing control, and Wednesday's early green candle gives a sense that near-term momentum might be building and a more decisive break is underway.
The initial target is just a little higher at 1.1630, that's the high from August 14 and July 07 last year. Again, the inability to extend beyond here points to a significant regional resistance.
What's Helping the Pound Move Higher?
On the GBP front, the UK's elevated bond yields are an important driver in a currency world where carry remains so important.
The UK's bond yield is elevated relative to that of Eurozone countries, and that means there's a considerable demand for GBP relative to EUR.
For this trade to endure, global sentiment must be constructive, and we are seeing such conditions at present.
Although yields have come under pressure of late, it's worth noting those of the Eurozone countries have fallen faster.
The yield differential between the UK and Germany is worth keeping an eye on, and we've seen that rise again in recent sessions.
Politics Offers Relief
The political situation in the UK has offered some help: the removal of Starmer and signs that Andy Burnham won't be challenged when replacing him are helping.
We wrote about a short-term Burnham bounce in Tuesday's leader, here. We said the pound's relief is a reaction to 'least-bad' developments over recent hours: a leadership battle has been avoided and Burnham has once more committed to respecting the fiscal rules.
"Burnham’s team do not expect a leadership contest, reducing the risk of prolonged political uncertainty," says Samara Hammoud, analyst at Commonwealth Bank.
Euro Rate Hike Bets Recede
The Eurozone PMI released Tuesday showed inflationary headwinds eased significantly in June, raising expectations that the ECB won't need to raise rates again.
On Monday ECB President Christine Lagarde alluded to this in an appearance before European lawmakers.
The recalibration in rate expectations is weighing on the euro, as Brent Donnelly, strategist at Spectra Markets puts it:
"Funny how a hawkish ECB responding to an oil shock was bearish EURUSD and a dovish ECB responding less to the same oil shock that is pretty much over is… Bearish."
