Image © Adobe Images
GBP/EUR eases from highs | technicals say broader uptrend intact | Credit Agricole thinks rally is complete.
By the midweek marker, the pound-to-euro exchange rate had eased from Monday's multi-month high 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 are experiencing 'buyer's regret', and as the chart shows, the pullback is best described as a healthy one for those wanting an even stronger sterling.
The daily graph shows 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, the level above which a pair is considered overbought.
From here, it's worth considering the broader technical setup: it's still bullish with the RSI still consistent with positive momentum and the pair holding above short- and medium-term moving averages.
Had the RSI dipped sharply and pointed 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.
The analysis says 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 some 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 Again
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 at the French-based bank, 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.
Near-term, the outlook remains consistent with more-of-the-same, and that will encourage GBP buyers.
Regarding domestic politics, the summer recess is about to start and that means the incoming Prime Minister can look forward to weeks of shallow scrutiny, which is consistent with recent GBP gains.
However, Burnham can't ride under the radar forever, and we suspect that the end of summer will see anxieties over the shape of his first budget increase.
That could mark an important moment for the domestic currency.
Where Next for the Pound? Get the Quarterly Forecast Report
Point forecasts, highs and lows from global banking partners, out to early 2027.
