The euro has been on a downward trend against the pound for seven out of the past eight trading sessions. While it might be easy to assume that this means the euro is weak, the truth is the pound’s strength is the major factor here. The pound has just enjoyed its best week in three months, reaching a one-year high against the euro, and this is happening in the midst of a leadership crisis, with neither a prime minister nor a finance minister currently appointed. The euro isn’t collapsing; rather, it’s the rising pound that’s influencing the cross.
Bank of England rate hike confirmed three sessions after coin toss
In just a week, expectations about interest rates shifted significantly in favor of the pound. On Monday, market predictions indicated a roughly 70% likelihood that the Bank of England (BoE) would raise rates by year-end. By Tuesday, that probability increased to 76%, particularly after the White House announced a ceasefire with Iran during the NATO summit in Ankara. Regardless, rising Brent crude oil prices have led to concerns about inflation in gas-rich Britain, which still faces economic challenges.
Before geopolitical issues came into play, the domestic climate was looking hawkish. In June, the BoE decided to keep rates steady at 3.75%, with a vote of 7-2; the chief economist and external committee members were in favor of raising rates to 4.00%. Services inflation held at 3.7%, significantly above the headline 2.8%, and the governor ruled out any near-term cuts to interest rates. The committee’s most hawkish member has even secured three speaking engagements this week.
Usually, a lack of leadership would create currency risk, but the pound seems unfazed. Andy Burnham is still the likely candidate for prime minister without a finance minister named yet, and Ed Miliband has emerged as a potential frontrunner. However, the markets feel reassured that new leadership will stick with existing fiscal rules. Even a financial stability report that warned about risks didn’t seem to faze the pound.
The European Central Bank made hawkish comments all week, and markets shrugged.
On paper, the euro’s situation isn’t dovish. The European Central Bank (ECB) raised interest rates for the first time this year in June, bringing deposit rates to 2.25% and adjusting its inflation forecast for 2026 to as high as 3.0% following the energy crisis. Various speakers throughout the week reinforced a similar message, with one board member, previously considered dovish, surprisingly adopting a hawkish tone.
However, the euro didn’t quite reflect Wednesday’s robust hawkish commentary aimed at addressing temporary energy price shocks. With preliminary inflation figures for June softening, the urgency has diminished. Expectations for another rate hike in September have shifted toward uncertainty from the three hikes anticipated at the June meeting. With data failing to support hawkish rhetoric, the euro is facing pressure.
On Monday, the data analysis leaned towards dovish signals. Producer prices exceeded expectations, rising by 5.9% year-on-year against a consensus of 5.7%. Yet, retail sales fell below projections, and investor confidence weakened to -3.1, although it did see rapid improvement. The ECB forecasts a modest growth of 0.8% for the year, which offers shaky support for an economic upturn despite vocal hawkish advocates.
Two upcoming meetings are scheduled to mediate the differences.
Looking ahead, attention will shift back to central bank meetings. The ECB’s decision is scheduled for July 23, while the BoE will follow on July 30. This sets the policy gap at nearly 150 basis points since the start of the year, with a 225 basis point advantage for the pound. The expected direction of movement has reversed in the last couple of weeks, resulting in the cross adjusting accordingly.
Right now, congestion in the market is a notable vulnerability. If a fully priced-in hike occurs, it could be disappointing, suggesting that the central bank has more leeway to adjust downward than to exceed market expectations, which have grown indifferent to the ECB’s messaging. With seven declines in eight sessions, any fluctuations in interest rate chatter could be heightened during an upward move.
Technical level and bias
Resistance: The recent spike at 0.8555 serves as the initial ceiling before reaching the key level of 0.8600. Additionally, the broader structure is facing constraints from the declining 50-day exponential moving average (EMA) around 0.8628, with the 200-day EMA nearby at 0.8655.
Support: A new low at 0.8519 is the only support in sight before hitting the 0.8500 level, which remains the last defensive barrier on the daily chart.
Bias: Low. The daily Stochastic Relative Strength Index sits around 7.55, indicating it’s highly oversold, potentially pushing back toward 0.8550 and even 0.8600. However, with the ongoing trend, rate differentials, and adjustments all favoring the same direction, any rally remains tethered below 0.8600 with selling pressure likely, making 0.8500 the next focus.
