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GBP/EUR is underpinned by constructive technicals and Britain's elevated interest rates relative to the eurozone.
On interest rates: the war in Iran raised the price of oil and lifted inflation expectations. In response, the market sees the Bank of England raising rates, which underpins the UK's rate advantage over Europe.
It's why GBP is actually the third-best performing currency in the G10 since the start of the war.
As long as tensions remain elevated, that outperformance can continue: To be sure, the U.S. and Iran continue to talk, but the process is taking time, right now there's no real prospect of an enduring deal being reached.
In fact, headlines from the Middle East show renewed escalation with the U.S. striking targets in Iran over frustration over an inability to strike a deal.
As long as tensions remain high so too will oil prices, which will underpin inflation expectations and Britain's yield advantage. That's supportive for GBP/EUR, provided global risk sentiment remains contained.
ECB Wasn't Hawkish Enough: The ECB decision on interest rates has just passed. Here, a 25 basis point interest rate rise was delivered as expected.
However, the move was already in the price of the exchange rate and the ECB wasn't strident in advocating for another hike.
The market went into Thursday's event expecting two further hikes, but the ECB was non-committal, suggesting it thinks expectations for just one further hike are likely more appropriate.
That means there's further scope for Eurozone rate hike expectations to retreat in the coming weeks as the data confirms the Eurozone isn't facing an inflationary spiral, potentially weighing on the euro.
Next week the Bank of England is expected to keep interest rates on hold. However, it could signal that it will raise interest rates at the next meeting as it aims to deliver an insurance hike.
That would be supportive of GBP.
But, we'd also be cautious of elevated rate hike expectations coming down in the UK too, as the Bank would much rather sit and wait this current inflationary cycle out.
Technicals are bullish... Even if GBP/EUR is approaching the massive 1.16 barrier.
It has not passed this level since July last year, meaning there's nearly a year of precedent standing in the way of GBP/EUR's ability to advance.
That means there's a high risk that further rallies are resisted.
Yet, the exchange rate trades above the rising 100-day moving average, and recent pullbacks have been shallow.
This ensures the next attempt of 1.16 will be done with far more favourable technical backing than has been the case in any recent attempts.
Medium-term headwind: UK politics will be a potential headache for GBP in the coming months as Andy Burnham seeks to topple Keir Starmer.
The market is taking the eventuality in its stride, so we'd caution of over-egging this risk.
We think it would require PM Burnham to make some poor fiscal calls for the market to show nerves.