Photographer: Alain ROLLAND. Copyright: © European Union 2025 - Source: EP.
Pound sterling holds a constructive setup ahead of a week that will be dominated by UK political and central banking developments.
The balance of probabilities remains tilted modestly in favour of further gains while pound-to-euro holds above its rising moving averages.
Another challenge of the 1.1600 resistance level appears likely, and repeated tests suggest the barrier is gradually coming under pressure.
However, the market still requires a decisive daily close above 1.1600 to confirm a fresh bullish breakout that opens the door to 1.1632, the next major resistance level.
Until then, the most likely outcome is continued consolidation within the established range, albeit with a slight bias towards sterling eventually forcing a move higher.
Looking at the details of the market setup, we see Sterling continues to trade above both its rising 21-day and 100-day moving averages versus the euro, confirming that the broader trend remains positive despite repeated failures to deliver a decisive breakout.
The sharp rebound from the mid-June low - and Friday's recovery from the low at 1.1560 - also reinforces the view that buyers remain willing to accumulate sterling on dips.
Underlying buying pressure is gradually building, even if bulls have yet to force a sustained move higher.
Burnham Speech in Focus
There are no tier-one data events from the UK this week, but politics will be closely watched as Andy Burnham is due to set out his views on the economy, where he could drop some important path-finders that will point us to where his policy agenda will lean.
The soon-to-be Prime Minister's economic agenda will be crucial for the economy and public finances, and his speech in Manchester will be closely watched.
For markets, there's a tension between Burnham's left-leaning and socialist tendencies and the need to be sober enough to keep markets onside.
"Markets have been unfazed by events so far, but we think many market participants are instinctively wary of Burnham given his previous comments. This means any missteps could see sentiment move against the new government," says a new research note from Oxford Economics.
UK bond yields already trade at a premium to similar international benchmarks (above), which tells us investors see a challenging inflationary outlook in the UK owing to existing government policies that favour high borrowing and spending.
A spendthrift Burnham risks exacerbating that: too many spending commitments and bond yields continue to rise, and the risk of a negative currency reaction grows.
At the same time, if Burnham is light on details but shows he is thinking about boosting productivity, GBP/EUR could extend gains.
His pick for Chancellor will also be important as it will signal where policy will land. Currently, the centrist Wes Streeting is the odds-on favourite for the role. But we've recently seen odds rise for left-leaning Ed Miliband.
"Burnham’s plans are likely to be towards a more interventionist state," says George Buckley at Nomura. "Whether this can be achieved under the current set of fiscal rules is perhaps the most important question that needs answering by the incoming administration."
For the pound, a Miliband chancellorship is considered the most likely to test the existing rules, meaning the pound faces a challenging H2 if he is selected.
All Eyes on Sintra
Sintra, Portugal, is the focus of the coming week as a number of central bankers will gather for the ECB's annual gathering.
For the euro, ECB President Lagarde's opening address late-Monday could be important if she touches on the ECB's latest thinking regarding interest rates. "If any meaningful signals on the future path of ECB monetary policy are to emerge from the conference, they are most likely to come from Lagarde’s introductory speech," says a market note from UniCredit Bank.
The global highlight could well be on Friday, when the conference closes with a policy panel in which Lagarde is joined by Kevin Warsh (Federal Reserve), Andrew Bailey (BoE) and Tiff Macklem (BoC).
For the pound, we will be on the lookout for any policy-relevant signals from Bailey.
The market currently expects the Bank of England to raise interest rates on one occasion this year, but this pricing could fall if Bailey strikes a more relaxed tone on inflation given recent falls in oil and gas prices.
If so, the pound could come under pressure.
