Pound Hits €1.17 as UK Political Risk Fades, Eurozone Inflation Softens

The pound hit a fresh one-year high against the euro Thursday, touching €1.1696 before settling near €1.1689. The move extended a rally that has lifted sterling roughly 2.5% from the June lows, driven by two converging stories: a quieter UK political backdrop and a eurozone inflation picture that keeps the European Central Bank on hold.

UK political risk has been the bigger factor. The government's budget passed without the usual market drama, and the opposition's lead in polls has narrowed, reducing the odds of a snap election that would freeze policy. Sterling traders have been pricing out the tail risks that had weighed on the pound since the spring. Fewer headlines out of Westminster means less reason to hold a euro hedge.

On the euro side, the case for a stronger single currency has weakened. Eurozone inflation came in softer than expected in June, with the core rate slipping. That took the edge off any hawkish ECB repricing. The market now sees the next rate cut coming in September, and the deposit rate settling near 2.75% by year-end. Lower terminal rate expectations cap the euro's upside, especially against currencies where the central bank is still fighting inflation.

The pound's yield advantage has widened. UK two-year real yields sit roughly 40 basis points above German equivalents, and the gap has been expanding. That attracts carry flows, and the positioning data suggests the market is still underweight sterling relative to the past year. A short squeeze on any positive UK data could push the pair through €1.17.