Above: von der Leyen and Trump agree a new trade accord on Sunday. Photographer: Fred Guerdin. European Union, 2025. Source: EC - Audiovisual Service.
Pound Sterling is due a short-term rebound ahead of a fall to new lows.
The Pound to Euro exchange rate (GBP/EUR) reaches oversold levels on Monday, and we would look for a shallow rebound in the coming hours and days, ahead of nenewed pressures.
Potentially offering the Pound some near-term support is the weekend news that the EU and U.S. have agreed a new trade deal that will cap a basic import tariff on EU goods going into the U.S. at 15%. This is well below the 30% tariff the U.S. was looking to charge in the absence of no deal.
The deal, struck by President Donald Trump and EU Commission President Ursula von der Leyen in Scotland on Sunday, boosts investor confidence at the start of the week.
GBP/EUR is better supported in episodes of improving risk sentiment, which is why a trade deal involving the EU could be more beneficial to Sterling than the Euro in the near term.
From a technical perspective, the GBP/EUR has been trending lower through July and remains capped by the nine-day exponential moving average (EMA). While below here, expect a series of fresh lows to be printed.
That being said, Friday's selloff to new lows at 1.1438 means the pair has diverged too far from the nine-day EMA, requiring a short-term rebound to allow for some mean reversion that will close the gap.
Our Week Ahead Forecast looks for GBP/EUR to revert back towards the nine-day EMA, near the 1.15 level, in the coming hours and one to two days ahead of a fresh leg lower.
Another way of telling this story is via the layering of the Bollinger bands on the daily chart:
The above shows that the exchange rate tends to trade within the bands, but when it reaches the outer bands, a correction back towards the 20-day simple moving average must occur.
The oversold nature of the exchange rate is corroborated by the Relative Strength Index (RSI) in the lower panel, which at 29 is now oversold. Anything below 30 signals oversold conditions.
Strategists at UBS also see GBP/EUR as being oversold short-term (EUR/GBP overbought), and look for some relief for Pound Sterling to come into view.
"The pound has come under pressure in recent weeks, as markets started pricing in more rate cuts from the Bank of England. Although we see EURGBP grinding higher over the next 12 months, we see the recent rise as stretched and like to sell the upside in the pairing above 0.8725 over a one-month horizon," says Dominic Schnider, Strategist at UBS Switzerland AG.
The fundamentals remain pitted against Pound Sterling, with July's major data prints all disappointing against expectations, including Friday's below-consensus retail sales print for June, which triggered a move to fresh multi-week lows in GBP/EUR.
Above: What the market thinks will happen to Bank Rate. The chart shows a sharp repricing lower since January. Image courtesy of Goldman Sachs.
"The UK data dump over the past couple of days shows an economy running at half pace at the start of summer," says Kallum Pickering, Chief Economist at Peel Hunt.
The Bank of England is expected to respond to the data with a series of interest rate cuts, which contrasts noticeably with the European Central Bank (ECB) which might have just ended its own rate cutting cycle.
With the Bank likely to outcut the ECB in the coming months, we receive a strong fundamental narrative that favours further GBP/EUR downside.
Fears about the UK's debt levels will also weigh on Pound Sterling, with Ray Dalio, the billionaire founder of Bridgewater Associates, warning at the weekend that "the UK is in a debt doom loop," and warning signs about a debt crisis were "beginning to flash and flicker".
He also warned that bond markets were too complacent about the excessive borrowing by many Western governments and the risks were not fully priced in.
Above: Britain's ten-year bond yield. The chart shows the cost of borrowing is now above Liz Truss 'mini budget' levels.
Debt worries have cropped up time and again in recent months, and will likely continue doing so, particularly with the Autumn budget - due in November - drawing closer.
Turning to the calendar, there is limited interest from the UK this week, which could allow Pound Sterling to creep higher, in line with our view that a near-term correction is likely.
In the Eurozone, GDP data out on Wednesday and CPI figures are due on Friday, both of which should corroborate the view that the ECB might have ended its rate cutting cycle.
We think it would take a massive surprise in either prints to shake the Euro off its ongoing path of appreciation.