Pound to Euro Exchange Rate's Push Higher Reaches Notorious Resistance Zone

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Pound Sterling is making a fresh push higher Friday, bolstered by the Bank of England's message that interest rates will only be reduced gradually, but the advance could yet be thwarted by technical resistance.

The Pound to Euro exchange rate (GBP/EUR) has lifted to 1.1918 at the time at the time of writing as it builds on the previous day's gains that followed the Bank of England's decision to hold Bank Rate at 5.0% and caution that "In the absence of material developments, a gradual approach to removing policy restraint remains appropriate."

Beware, euro buyers, that GBP/EUR is still within a notorious resistance zone that could act to frustrate upside. To understand the significance of this region, it is worth flipping the exchange rate on its back, to take a look at EUR/GBP.

When we do this we note that the EUR/GBP is trading near the 0.84 level, which acts as a formidable 'round number' psychological support for the Euro. In fact, the Euro has not closed below here August 2022. Market participants will be buying euros here in the hope that it will bounce back above 0.84, as has been the case so many times in the past.

From a GBP/EUR perspective, this means there is great selling interest at 1.1904 (which equals 0.84 in EUR/GBP). But we would widen the band to a resistance zone between 1.1904 and the briefly held July 2024 peak at 1.1928.

Could today be the day that the Pound finally closes above 1.1904 for the first time since 2022? We clearly don't have the answer, but we suspect that this will eventually happen in the coming weeks.

Above: GBP/EUR (top) with resistance drawn and EUR/GBP with the key 0.84 support shown.

This is because the Bank of England's cautious approach to interest rate policy is a significant source of support for the Pound. The 8-1 vote on the Monetary Policy Committee to keep rates unchanged signals caution abounds and this sets it apart from the Federal Reserve and other central banks, where there appears to be greater haste in bringing down interest rates.

International capital chases interest rates, and now the UK has the highest relative rate in the the G7 this can underpin the Pound until such a time as rates start falling.

The Bank will next cut interest rates in November, which will leave the Pound sensitive to global matters in the meantime.

Investment bank consensus forecasts update: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/EUR. Please request a copy here.

Pound-Euro and Pound-Dollar are two exchange rate pairs that are highly sensitive to international investor sentiment, rising when stock markets rise.

If markets can continue to grind out gains, now that the tailwinds of Federal Reserve rate cuts are blowing, further upside is possible.

But any setbacks to global sentiment can frustrate the Pound and deal it regular, albeit shallow, setbacks.