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The British Pound looks to build on a recent recovery, even if upside potential remains strictly limited.
Pound Sterling has corrected higher against the Euro, Dollar and some other major peers over the second half of the past week, as the July selloff fades from exhaustion more than anything else.
Heading into the week, some technical indicators spoke of the need for some near-term gains to correct from oversold levels, while the bad news concerning the UK economy is now generally well understood and incorporated into exchange rates.
This left Sterling ripe for a rebound, with the trigger for that move coming on Thursday following the release of above-consensus UK wage data that spoke of enduring inflation pressures, which should limit the Bank of England's ability to cut interest rates too fast, or too far.
With foreign exchange markets moving away from Trump-related trade drivers, the focus returns to relative interest rate policy, ensuring the steady build-up of bets in favour of quicker Bank of England easing has weighed on the Pound.
This means Wednesday's hot inflation figures, combined with Thursday's inflationary wage numbers, send a reminder that the repricing lower of UK interest rate expectations will be limited, offering the Pound a hand.
"We downgrade our GBP outlook but maintain our view that it should recoup some ground vs the EUR & the USD in H225 and further outperform the EUR in 2026," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
The Pound to Euro exchange rate (GBP/EUR), which is now at 1.1550, looks like it wants to even out above 1.15, which was a level tested earlier this week and now looks to be forming a level of resistance.
Above: GBP/EUR is flattening out. RSI in lower panel reached oversold on Monday and is rebounding, reflecting the pick-up in spot above 1.15.
The EUR/GBP measure is at 0.8656. "We slightly adjusted our forecasts higher to reflect the new outlook and now see EUR/GBP around current levels in the coming months but edging slightly higher in 2026," says Patrick Ernst, FX Strategist at the UBS Chief Investment Office.
The Pound to Dollar exchange rate (GBP/USD) is meanwhile still very much dependent on the U.S. side of the equation. Here, the Dollar has been regaining recently lost ground, pushing GBP/USD down to 1.34 having been as high as 1.3750 at the start of the month.
"The Dollar rebound can gather some pace," says Francesco Pesole, FX Strategist at ING Bank N.V.
The dollar index, a broad measure of U.S. Dollar performance, is on track for a second consecutive week of gains, having rallied over 2% since the 1 July low of 96.50.
"While modest compared to the steep losses in the first half of 2025, the dollar has realigned with core macro drivers and notably re-established its positive correlation with 10year yields. One of our key calls this summer is that this return to dollar ‘functionality’ reduces the likelihood of new selloffs," adds Pesole.
Above: GBP/USD has found some near-term support, but could yet face a challenging summer.
Although the key GBP/USD and GBP/EUR pairs are forming potential bases, the prospect for a resumption of the recent selloff cannot be discounted.
For one, UK macroeconomic data is still a concern, with the UK labour market report on Thursday confirming an eighth consecutive month of job losses, while last week's GDP print made for the second consecutive monthly contraction.
"The mood surrounding the pound has soured in recent weeks and dovish comments by BoE governor Bailey on the labour market and interest rates put investors on notice for potentially further losses ahead," says Kenneth Broux, a market strategist at Société Générale. "A return below 1.34 could be on the cards"
Analysts at Crédit Agricole have meanwhile lowered their general Pound Sterling profile as a result of the slowing in economic momentum.
"We downgrade our GBP outlook given that recent developments have increased the downside risks to the UK economic outlook and could thus lead to a more aggressive easing from the BoE," says Marinov.