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Pound Sterling risks further losses in the coming weeks, although near-term stabilisation above 1.1450 is likely first.
The Pound to Euro exchange rate (GBP/EUR) recovered to as high as 1.16 last week before capitulating in spectactular fashion on Friday on account of the global market reaction to U.S. economic data.
Surprisingly weak job numbers Stateside prompted a stock market selloff that triggered the kind of investor volatility that typically weighs on GBP/EUR.
GBP/EUR collapsed by 0.92% on Friday alone, which is an unusually large daily move and a strong technical signal that the preceeding attempted rebound has failed. Indeed, the inability to hold the recovery confirms the chronic weakness in the exchange rate, where periods of strength are ultimately sold into.
Short-term, we look for the intense selling pressure of the previous session to fade and note the pair has now diverged from its nine-day exponential moving average (EMA), and a mean-reversion towards this trend line is likely.
Given this, we would not be surprised to see a short-term, albeit shallow, recovery to approximately 1.15 by midweek, from where we would expect the deeper selloff to extend to the 2025 lows at 1.1415 and even below.
As always, our Week Ahead Forecast offers a directional guide more so than a set of point targets to live and die by, and the model has proven particularly good at providing readers with a sense of near-term directionality in GBP/EUR and other GBP pairs over recent weeks.
Above: GBP/EUR recent and potential price action.
Although we have the Bank of England interest rate decision due on Thursday, the intensity of the GBP/EUR selloff on Friday confirms global factors will arguably be of greater importance over the coming days.
Stock market weakness and associated volatility have traditionally weighed on GBP/EUR: the most recent example is the fall that followed the April 02 'liberation day' tariff announcements. For historical context, the all-time low in GBP/EUR followed the market crash that happened during the 2008 financial crisis.
Markets are worried about the U.S. economy in light of still-high inflation and signs of a weakening job market, which is what Friday's U.S. payroll report showed: 73K jobs were added in July, massively undershooting the consensus estimate of 110K.
Typically, the Federal Reserve would respond and cut interest rates to support the economy and protect jobs, but in 2025, it is constrained by the higher inflation levels in the economy, particularly given that tariff-induced inflation is still set to flow through.
This is making investors nervous and further weakness in stocks and GBP/EUR cannot be discounted.
Domestically, the Bank of England is another risk for Pound Sterling; the UK's labour market is also deteriorating, and the Bank, whose Monetary Policy Committee is packed with 'doves', will cut interest rates again by 25 basis points.
Any indication that it wants to quicken the pace of cuts from the current quarterly run-rate will likely weigh on Sterling.
However, there is also a potentially GBP-supportive scenario to consider where the Bank cuts interest rates but warns against expecting more.
UK inflation is well above 2.0% and set to rise further. In fact, many Britons will have noticed of late the incredible rise in food prices, with retailers warning food price inflation might hit as high as 4.0% in December.
Above: UK inflation is rising again.
The Bank tends to discount food from its thinking as it is not a measure of 'core' inflation; however, food does have an important role in influencing consumers' inflation expectations, which is incredibly important for the evolution of realised inflation.
The Bank wants to avoid inflation expectations becoming entrenched at high levels and could lead it to signal that further cuts will be dependent on the data and that risks in the inflation outlook remain.
If this is the case, the Pound could find itself better supported into the weekend.
"We have a hawkish Bank Rate forecast, expecting August to see the final cut this year, and the last cut until after 2027," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics.