Pound-to-Euro Week Ahead Forecast: Will GBP Hold One-Year High?

The pound climbed to its strongest level against the euro in a year last week, touching €1.1696 before settling at €1.1663. That marked a 1.1% weekly gain. Sterling advanced as the UK's new Labour government quickly settled into office, removing the political uncertainty that had weighed on the currency through the election campaign. On the euro side, the single currency struggled after hawkish comments from European Central Bank officials pushed back expectations for rate cuts, narrowing the interest rate differential that had earlier favoured the euro.

This week the focus turns to data that will test the pound's rally. UK consumer price inflation for June is due Wednesday. Traders said a reading above the 2% target would keep the Bank of England on hold, while a softer number would revive bets on an August cut. The market is pricing around a 40% probability of that reduction, according to swaps data.

Eurozone data will also play a role. Flash purchasing managers' indexes for July arrive Friday, giving an early read on economic momentum in the bloc. Traders said weak numbers would increase the case for the ECB to ease policy further, weighing on the euro. The ECB has signalled it could cut rates again in September if the outlook deteriorates.

The broader dollar backdrop also matters for GBP/EUR, as a weaker greenback tends to support both sterling and the euro. For more on the pound's performance against the dollar, see the GBP/USD profile.

The UK election result removed the risk of a hung parliament or a Labour government with radical fiscal plans. That allowed the pound to recover from levels near €1.15 earlier this year. The euro, meanwhile, has been pressured by political uncertainty in France, though that has eased after the June snap elections produced a hung parliament rather than a far-right victory. Still, the euro has not recovered against sterling because the ECB's messaging has not been as hawkish as the BoE's in relative terms.

Technically, the €1.1696 level is the highest since early July last year. A clear break above that could open the €1.1750 area, traders said. On the downside, a miss on UK CPI could pull the pair back toward €1.1600, the low from mid-June.

GBP/EUR traded near €1.1660 early Monday. UK CPI data at 6 a.m. ET Wednesday is the next major catalyst.