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Pound-Euro can retest 1.18 if support at 1.1670 survives a pivotal Bank of England week.
The Pound-to-Euro exchange rate enters the new week at 1.1717, having spent the past fortnight digesting the advance that took it to a thirteen-month high at 1.1824.
The technical picture continues to favour Sterling over the medium term, but the immediate outlook is more balanced than it was two weeks ago.
The overbought condition we flagged at the highs has been successfully worked off without damaging the underlying trend, which is constructive; however, the market still needs to prove buyers are prepared to resume the advance.
Above: GBP/EUR at daily intervals.
Provided GBP/EUR can continue to hold above the 1.1670-1.1700 support area, the balance of probabilities favours another attempt on 1.1750 and ultimately the 1.1800 high.
A decisive break below that support zone would instead suggest the pair requires a longer period of consolidation before the broader uptrend can reassert itself.
The Rate Advantage Doing the Work
The macro backdrop underpinning the trend remains constructive for the Pound.
Inflation expectations are building again, in no small part due to the resumption of hostilities in the Gulf and the associated rise in oil and gas prices.
Crucially, the UK carries a 'high beta' to inflation: when inflation bets rise anywhere, they rise faster in Britain, and UK short-term interest rates respond with a greater multiplier.
Above: GBP/EUR top and the UK minus Germany spread on the two-year bond yield.
That dynamic is visible in the chart above, where the Pound has climbed against the Euro even as German two-year yields pushed to fresh cycle highs; the relative rate story, for now, works in Sterling's favour.
As long as the inflation impulse persists, dips in Pound-Euro should continue to find sponsorship from the rates channel.
The Bank of England Decides the Week
The coming week's calendar is dominated by Thursday's Bank of England decision, and it arrives with the Monetary Policy Committee facing genuinely two-sided evidence.
On one side sits a third consecutive downside surprise in CPI inflation; on the other, higher energy prices and signs of firmer-than-expected activity, including the rise in the July 'flash' composite PMI to 52.1 and stronger-than-expected June retail sales.
Inflation persistence will remain a concern, although policymakers will differ on if and when rates need to rise further, especially given that higher longer-term market rates have already done some of the MPC's work.
Where Next for the Pound? Get the Quarterly Forecast Report
Point forecasts, highs and lows from global banking partners, out to early 2027.
Expect a 7-2 vote split, with Pill and Greene continuing to favour a higher Bank Rate while the majority, for now, prefer to wait.
For the Pound, the rule of thumb is simple: anything that leans more 'hawkish' will bolster UK short yields and the currency.
What might that look like? More than two MPC members voting to hike, or communications that ultimately hint a rate rise is back on the table.
Either outcome would likely provide the catalyst the chart is waiting for, sending Pound-Euro back towards 1.1750 and the 1.1800 high.
A patient, on-hold message with no hawkish garnish is the scenario that leaves the pair drifting back into the 1.1670-1.1700 support zone, where the medium-term uptrend would face its first meaningful test.
Politics: Burnham Spending Watched Closely
National media report the new Prime Minister is due to unveil his flagship social care plans, a massive expansion of care housing and nursing homes under the National Care Service concept he has championed since serving as Health Secretary in 2010, with the Health Foundation estimating the measure would cost £18.5BN a year.
The Prime Minister has established a clear operating rhythm in his first days in office, delivering three giveaways already: a VAT cut on electricity bills, a cap on bus fares and a business rates cut for pubs and entertainment venues.
Economists judged those measures too small to shift the fiscal dial, describing them as political messaging designed to generate friendly headlines, but the care plans land in a different weight class.
Each announcement contributes to the same macro direction of travel: an easier fiscal stance that feeds the UK's higher inflation run rate and, through it, the lift in UK yields.
The rule for pound watchers os straightforward: anything inflationary means higher yields and a higher Pound.
But the rule carries a BIG RISK on its other side: GBP support only holds while markets believe the giveaways will ultimately be funded. Markets will be quick to flip the switch and sell if concerns about fiscal sustainability rise.
Where Next for the Pound? Get the Quarterly Forecast Report
Point forecasts, highs and lows from global banking partners, out to early 2027.
