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Pound sterling breaks through key technical level against the euro and reaches highest since August.
The pound-to-euro exchange rate has risen to 1.1611 in midweek trade, a level last seen on August 27, suggesting a potentially significant technical move is underway that could unlock further advances.
The pair has long been hemmed in by the massive layers of selling interest that are clustered around 1.16, ensuring it has become a hard-and-fast barrier to progress higher.
No less than seven attempts at a breakthrough have been made since last August, and none have stuck; indeed, this one might yet still fail.
However, there's a good chance of a breakthrough here: Tuesday's close at 1.1600 was a signal that the sellers were losing control, and Wednesday's early green candle gives a sense that near-term momentum might be building and a more decisive break is underway.
The initial target is just a little higher at 1.1630, that's the high from August 14 and July 07 last year. The inability to extend beyond this point in early 2025 suggests this is probably the upper limit of the resistance zone. So there's a lot more work to do for the sterling bulls.
What's Helping the Pound Move Higher?
On the GBP front, the UK's elevated bond yields are an important driver in a currency world where carry remains so important.
The UK's bond yield is elevated relative to that of Eurozone countries, and that means there's a considerable demand for GBP relative to EUR.
For this trade to endure, global sentiment must be constructive, and we are seeing such conditions at present.
Although yields have come under pressure of late, it's worth noting those of the Eurozone countries have fallen faster.
The yield differential between the UK and Germany is worth keeping an eye on, and we've seen that rise again in recent sessions.
Politics Offers Some Short-term Relief
The political situation in the UK has offered some help: the removal of Starmer and signs that Andy Burnham won't be challenged when replacing him are helping.
We wrote about a short-term Burnham bounce in Tuesday's leader, here. We said the pound's relief is a reaction to 'least-bad' developments over recent hours: a leadership battle has been avoided and Burnham has once more committed to respecting the fiscal rules.
"Burnham’s team do not expect a leadership contest, reducing the risk of prolonged political uncertainty," says Samara Hammoud, analyst at Commonwealth Bank.
Euro Weakens as Rate Hike Bets Recede
The Eurozone PMI released Tuesday showed inflationary headwinds eased significantly in June, raising expectations that the ECB won't need to raise rates again.
On Monday ECB President Christine Lagarde alluded to this in an appearance before European lawmakers.
The recalibration in rate expectations is weighing on the euro, as Brent Donnelly, strategist at Spectra Markets puts it:
"Funny how a hawkish ECB responding to an oil shock was bearish EURUSD and a dovish ECB responding less to the same oil shock that is pretty much over is… Bearish."
But Be Under No Illusion, There Are a Tough Few Months Ahead
Although near-term developments are helping pound-euro advance, there are still significant headwinds ahead.
Most notably, Bank of England rate hike bets can fall further and that should ultimately reduce the UK's rate advantage and weigh on sterling.
"Given that current economic conditions do not appear particularly conducive to such effects, we have removed our call for a rate hike. The market still prices 31bp by year-end. We now expect Bank Rate to remain on hold for the remainder of the year," say economists at Rabobank.
Politics will also become an issue once Burnham is installed and he tries to wrestle with the intractable realities of the UK's fiscal situation.
He has made sweeping promises for a more radical politics, but he needs more money to deliver. He can't borrow much more without testing lenders' resolve, and he won't cut spending owing to the nature of the parliamentary Labour Party.
That leaves taxes as the only viable lever, and with taxes at post-war highs, he will struggle.
"Huge uncertainty remains about Mr. Burnham’s policy platform, so we think that businesses will remain hesitant over the coming months, weighing on GDP growth," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics.
The Autumn budget could therefore become another high-anxiety event for British businesses and households and we could see the pound struggle in the approach.
"UK resilience may frustrate shorts, but closer to the Autumn budget we expect fiscal risk premium to build," says Meera Chandan, FX strategist at JP Morgan in a recent GBP overview note that touches on current political developments.
JP Morgan holds a near-term GBP/EUR forecast target of 1.1235 on "fiscal risks being more fully priced in."