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The Bank of England decision and the Iran-Israel conflict are the two major drivers for the British Pound.
The Pound to Euro exchange rate (GBP/EUR) has entered a short-term downtrend and could stay under pressure in the coming days, thanks to a combination of geopolitical tensions and a potentially 'dovish' Bank of England decision.
However, we think an initial retracement higher is warranted as the market catches up with the recent selloff.
With that in mind, we see the GBP/EUR has deviated from the nine-day exponential moving average and will need to make contact again, as is the mean-reverting tendency of the pair.
This puts the market in scope for a potential move towards 1.1775 and even 1.18, before potentially extending the selloff of recent days back towards last week's lows near 1.17.
Above: GBP/EUR at daily intervals.
The big move we saw last week had more to do with domestic UK concerns and broader Euro buying than it did the Iran-Israel conflict, which is telling.
This means that, should geopolitical tensions remain elevated at current temperatures, the Pound-Euro won't necessarily struggle. That being said, a major mistake by either side that results in clear escalation (for instance, Iran's threat to close the Hormuz Strait) bears watching.
A major stock market selloff linked to such developments would be unequivocally bad for the Pound-Euro as this is a pair that does not like elevated financial market volatility.
The Bank of England decision on Thursday won't result in another interest rate cut, but expect policy makers to address the recent set of soft employment figures and GDP numbers, potentially signposting an August rate cut in the process.
The market raised the odds of an August rate cut following last week's labour market and GDP numbers, which mechanically weighed on domestic bond yields and the Pound.
However, an adjustment in expectations is now arguably fully 'in the price' of the Pound, and for this reason, we don't think the moves post-BoE will be massive.
This all points to the GBP/EUR potentially retracing some of last week's losses and making a move on the 1.18 area.
However, the view remains that any strength will be short-lived and that ultimately the preference is for a move to the downside over the next two weeks.