Pound-to-Euro Cools from Overbought

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Pound sterling pulls back from highs, technicals say broader uptrend intact, but Credit Agricole thinks rally is complete.

The pound-to-euro exchange rate has this week eased back from multi-month highs at 1.1748 to settle back at 1.1718.

That's a relatively minor pullback and, according to the technicals, doesn't suggest sterling bulls have 'buyers regret'.

Indeed, as the chart shows, the pullback is healthy as the pair had become overbought according to the RSI - see lower panel in the chart - and was therefore in need of a consolidative pullback.

The RSI has now retreated from +70 levels to just below 70, which marks the point at which a pair is overbought.

From here, it's worth considering the broader technical setup: it's still bullish with the RSI still consistent with positive momentum. If the indicator had dipped sharply and was pointing lower, we would be awake to the prospect of a deeper setback.

But the downside has thus far proven limited, and that's potentially consistent with further gains in the short-term.

Euro Set for a Comeback: Crédit Agricole

According to a survey of forecasts from leading investment banks, the pound is now trading well above the consensus forecast, which hints at an underlying overvaluation on its behalf.

Analysts at Crédit Agricole opine in a recent daily FX analysis that it's a case of "enough pounding!" for the euro.

"Perhaps one of the unexpected developments so far in July has been the relentless rally of the GBP vs the EUR that has recently pushed EUR/GBP to its lowest levels in more than a year," says the note.

They say the move seemed surprising because the EUR-GBP rate spread widened over the same period and thus undermined the claim that the GBP is benefiting from its appeal as a carry investment currency over the EUR.

Crédit Agricole explains other factors could explain the latest EUR/GBP underperformance:

(1) returning political risks in France after Marine Le Pen announced she would be National Rally’s presidential candidate in the 2027 election have coincided with a period of relative political lull in the UK;
(2) the unwinding of the still considerable EUR/GBP longs in FX markets; and
(3) the reacceleration of equity market inflows into the UK and the lack of significant inflows into the Eurozone, according to our ETF-tracker.

"We believe that the latest EUR/GBP correction is close to running out of steam and expect the cross to recover back towards 0.860 in coming months," says Crédit Agricole.

Why the Pound Will Dip

EUR/GBP at 0.86 equates to GBP/EUR at 1.1627, which if correct, implies that the exchange rate should keep its head above the major consolidation zone that trapped it for much of 2025-2026.

According to analysts, a pullback in the pound is on the cards because:

(1) EUR/GBP is starting to look very cheap relative to its short-term fair value that we estimate on the basis of EUR-GBP rate spread and measures of relative sovereign credit risks among other drivers;
(2) there is a risk that the Labour party could adopt left-wing policies after this week's change of guard at the helm that could shatter the calm in the gilt markets and hurt the GBP; and
(3) the current market BoE outlook is too hawkish and the GBP should continue to lose its rate advantage over the EUR, in our view.