Sterling Bulls Keep Pressure on the Dollar
The pound continues to recover against the US dollar, retracing recent losses from the previous session and trading around 1.3730 during Monday’s Asian session. The technical outlook on the daily chart remains constructive, with GBP/USD maintaining its upward trajectory within a well-defined ascending channel.
The 14-day Relative Strength Index (RSI) sits just below the 70 threshold, reinforcing bullish momentum. However, a break above this level could signal overbought conditions, raising the likelihood of a short-term pullback. Meanwhile, the pair's position above the nine-day Exponential Moving Average (EMA) supports a stronger short-term bias.
On the upside, GBP/USD is poised to challenge the 1.3770 level—its highest since October 2021—touched on 26 June. This aligns with the upper bound of the ascending channel. A decisive break above this key resistance could extend the rally, opening the door for a move towards the psychologically significant 1.3800 mark.
Initial support lies at the nine-day EMA around 1.3634. A drop below this level would weaken the immediate bullish structure and potentially see the pair test the channel’s lower limit near 1.3460, followed by the 50-day EMA at 1.3426. A further decline could expose the two-month low at 1.3139, recorded on 12 May.
Euro Inches Higher as Inflation Surprises Offset Trade Uncertainty
The euro regained ground against the dollar on Monday, reversing Friday’s dip below $1.17. Stronger-than-expected inflation readings from France and Spain, up to 0.3% (from –0.1%) and 0.6% (from 0.1%) respectively, have tempered market expectations of a September ECB rate cut, with odds falling from over 60% to just under 50%.
Attention now shifts to inflation data from Germany (due today) and the broader eurozone (tomorrow), both of which could be pivotal in shaping the ECB’s policy outlook and providing further support for the single currency.
Later on Friday, EUR/USD extended gains to $1.1754 (a fresh year-to-date high) on the back of weaker-than-expected US personal consumption figures. Although the pair held above $1.17 into the weekend, the rally was tempered as the Fed’s preferred inflation gauge, the core PCE index, rose 0.2%. While subdued spending may reflect caution stemming from President Trump’s unpredictable trade stance, the inflation reading was not soft enough to prompt a Fed pivot, reinforcing the central bank’s patient approach.
Focus now turns to this week’s US labour market data. While the dollar remains under pressure, ongoing resilience in employment could limit further euro upside. Absent a notable miss, EUR/USD is unlikely to break meaningfully higher.
Trade developments also remain in focus. The US has formalised an agreement with China following talks in Geneva, and both Washington and Brussels signalled optimism about reaching a broader deal before 9 July. With recent EUR/USD strength largely underpinned by trade-related uncertainty, any tangible progress could temper further gains for the euro.
Diverging Paths: Fed Dovishness vs BoE Caution
Sterling closed last week over 2% stronger against the dollar, lifted by broad-based dollar weakness and an increasingly dovish shift from the Federal Reserve. With a quiet UK economic calendar offering little resistance, the pound benefited from the broader move out of the greenback.
This sustained rally has even prompted a reversal in sentiment among longstanding sterling sceptics. Net positioning deeply negative at the start of the year, has now turned markedly bullish, highlighting a notable change in market tone.
Nevertheless, downside risks persist. Bank of England Governor Andrew Bailey adopted a cautious tone regarding the UK labour market. While his comments weren’t overtly dovish, markets have already priced in an 83% chance of a rate cut by August, with two full cuts anticipated by year-end.
On a nominal basis, UK rates remain higher than those in the euro area. However, stubbornly elevated inflation—headline CPI remains well above the 2% target continues to weigh on the BoE’s policy calculus, limiting the pound’s appeal as the Bank leans towards easing.
That said, real rate differentials with the US have narrowed since the start of the year, providing a layer of support for sterling. Should the Fed strike a more dovish tone, particularly if this week’s US labour data disappoints, the pound could find renewed momentum for another leg higher.
Domestically, the UK’s economic calendar is relatively light this week, with minor data releases unlikely to sway the BoE. As such, GBP price action is likely to be shaped more by external sentiment, particularly US economic and trade developments, than by domestic data.
