Pound Sterling Delivers Best Euro Rates in Three Months

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The pound to euro exchange rate (GBP/EUR) hit its best level since September 25...

... however, overbought conditions are flashing on the daily chart.

The British pound advanced 0.59% against the euro on Monday, carried on by solid technical momentum and supportive global market conditions.

Our Week Ahead forecast anticipated these gains, noting GBP/EUR had just completed a technical breakout above the 100-day moving average, taking spot to 1.1559. This delivers euro buyers retail rates above 1.15 with the best providers.

GBP/EUR built some upside momentum through the course of December as global equity markets ticked higher, confirming investor sentiment to be an important driver of the pair. Markets start 2026 in good spirits, helping the GBP recovery to extend into the new year.

"Global equities extended their gains yesterday, rounding off what has been a strong start to 2026, even though we are only a few trading days into the year. What stood out was a clear cyclical rotation, though once again not led by tech. Instead, leadership came from materials, industrials and financials," says Danske Bank in a morning client briefing.

The FTSE 100 is near last week's record highs at 10040, while the domestically focused FTSE 250 trades at its highest level since 2022 at 2261.

Defence stocks roared higher owing to the significant geopolitical shift triggered by the U.S. at the weekend, where U.S. military action in Venezuela confirmed that military might trumps international law.

Above: The RSI in the lower panel signals the move is now overbought.

UK assets are in demand in this rotation to traditional, cyclical and defence stocks, which could be contributing to the pound's bid.

The policy channel is also contributing to gains: expectations for the Bank of England to lower interest rates have receded somewhat since the Bank's December meeting.

In December, it lowered Bank Rate by 25 basis points but communicated it was still cautious about inflation. That caution encouraged traders to pare expectations slightly for future rate cuts, which tends to mechanically assist the pound.

There's also a definite element of 'short covering' of the pound's 2025 selloff against the euro driving momentum:

GBP/EUR fell steadily through the year, reaching a low of 1.1285 ahead of the UK's November budget.

The budget passed the test of not being an outright train smash of an event, meaning a low bar was crossed, prompting traders to shutter their bets against the currency.

This creates technical buying action that helps pound sterling in the short term.

We're still wary about whether the pound's recovery against the euro and a number of other currencies stalls as that short covering action completes.

Also, the daily chart shows the Relative Strength Index (RSI)  has just hit 70, which means the move is now overbought. As the RSI tends to mean-revert lower from 70, it implies a pullback in GBP/EUR must now occur. To be sure, for the RSI to unwind, GBP/EUR could also simply drift sideways, but we think there's reason to think the move might be due a pause.

Nevertheless, a lack of UK data, strong technical momentum and supportive investor sentiment mean any weakness should be shallow.