Stronger UK retail sales and improving business activity support the pound, but GBP/EUR must break 1.1760 to revive July’s rally.
The Pound to Euro exchange rate recovered on Friday after suffering three consecutive daily declines earlier in the week.
GBP/EUR traded at 1.1718 late on Friday, up 0.14% on the day but below the previous week’s close of 1.1763.
Sterling reached a July high of 1.1827 on July 15 before retreating as softer UK inflation encouraged some investors to take profits and the Euro received support from improving Eurozone economic data.
Despite the setback, GBP/EUR remains around 0.9% above the July opening level near 1.1610 and comfortably above the June close at 1.1610.
The pullback has also stopped close to 1.1700, suggesting buyers remain willing to defend the exchange rate above the former July consolidation zone.
The technical outlook is therefore constructive but no longer decisively bullish.
GBP/EUR has formed resistance between 1.1760 and 1.1780, an area containing several recent daily closes. A recovery above this zone would improve the prospect of another challenge to 1.1800 and the July high at 1.1827.
Initial support is located around 1.1700, followed by the July 14 low and earlier cluster of closes around 1.1725.
A sustained break below 1.1700 would expose the June high at 1.1623 and the July opening area between 1.1600 and 1.1610.
UK Economy Ends the Week on a Stronger Footing
Friday’s UK data offered some encouragement after employment and inflation figures had raised questions over the strength of the economy earlier in the week.
The Office for National Statistics reported that retail sales volumes increased 1.0% in June, defying expectations for a 0.3% decline.
Sales were also 4.2% higher than a year earlier, with warm weather, promotions and stronger online demand supporting spending.
Non-store retail sales rose 4.4% during the month, while the proportion of sales made online reached its highest level since April 2021.
The figures followed a 1.2% monthly increase in May and meant retail sales expanded 0.6% during the second quarter.
UK business activity also strengthened during July.
The flash composite purchasing managers’ index rose to 52.1, its highest level since February and above the 50 threshold separating expansion from contraction.
Services activity benefited from hospitality, domestic tourism and improved consumer confidence, while business cost pressures showed signs of easing.
The combination of stronger retail spending and renewed private-sector growth provides a better starting point for the new government and should reduce immediate concern over a sharp economic slowdown.
However, the improvement may prove vulnerable if higher oil and gas prices squeeze household incomes during the second half of the year.
Softer Inflation Limits the Pound’s Recovery
Sterling’s response to Friday’s data was positive but limited because the latest inflation report has reduced the urgency for further Bank of England tightening.
The UK consumer price index increased 2.6% in the year to June, down from 2.8% in May and below the Bank of England’s previous projections.
Monthly inflation was just 0.1%, while CPIH inflation declined from 3.0% to 2.8%.
The figures followed evidence that private-sector wage growth has slowed and vacancies have fallen to 712,000.
Together, these reports suggest that underlying domestic inflation pressures are easing, even though the renewed increase in energy prices threatens to push headline inflation higher later this year.
The Bank of England will announce its latest interest-rate decision next week.
Policymakers are widely expected to leave Bank Rate unchanged at 3.75%, but markets will focus on the vote split and any guidance concerning the remainder of the year.
A cautious statement that emphasises weaker wage growth and lower June inflation could weigh on the Pound, particularly if policymakers push back against expectations for further rate increases.
Pound Sterling would receive stronger support if the Bank concentrates on the inflation risks created by rising energy costs and signals that another increase remains possible.
For GBP/EUR, the decision will be important because the Pound’s interest-rate advantage over the Euro remains one of its main sources of support.
ECB Leaves the Door Open to Higher Rates
The European Central Bank left its three principal interest rates unchanged on Thursday, keeping the deposit rate at 2.25%.
In its latest monetary-policy decision, the ECB warned that the full inflationary consequences of the energy shock had yet to emerge.
The central bank maintained a data-dependent, meeting-by-meeting approach and said it would monitor the duration of the shock and the risk of indirect or second-round effects.
That kept the prospect of another increase in September alive.
Money markets continue to see a strong chance of two additional ECB increases before the end of the year, although weak growth could restrict how far policymakers are willing to tighten.
The economic picture improved on Friday as the Eurozone composite PMI rose from 50.0 to 51.9 in July.
The reading was well above expectations for 50.3 and signalled the strongest expansion in five months.
New orders returned to growth, while the survey was consistent with quarterly economic growth of approximately 0.3%.
An ECB survey published on Friday nevertheless showed economists expect Eurozone growth of only 0.6% during 2026, down from an earlier estimate of 1.0%.
The same survey placed average inflation at 2.7% this year and 2.2% in 2027.
The Euro therefore benefits from the possibility of further ECB tightening, but the outlook is constrained by weak underlying growth and the risk that higher energy costs damage the region’s manufacturing economy.
What’s the Forecast for the Pound versus the Euro?
The broader Pound-to-Euro exchange rate trend remains positive, but the failure above 1.1800 and three consecutive daily declines indicate that the July rally has entered a consolidation phase.
Friday’s rebound from 1.1700 is technically encouraging and suggests the correction has not yet developed into a more significant reversal.
The central forecast is for GBP/EUR to remain within a 1.1680–1.1780 range ahead of the Bank of England decision.
A break above the cluster of recent closes around 1.1760–1.1780 would suggest buyers are regaining control and expose 1.1800, followed by the July high at 1.1827.
A close above 1.1827 would confirm a fresh breakout and bring 1.1900 into consideration.
The downside risk would increase if GBP/EUR closes below 1.1700.
That would indicate the recent rebound has failed and expose 1.1620–1.1630, where the June high and former resistance are located. The July opening level near 1.1610 would provide additional support.
Stronger UK activity data and the Pound’s existing interest-rate advantage favour eventual recovery, but the Euro has gained support from a more hawkish ECB outlook and a surprisingly strong July PMI.
The Bank of England will therefore determine whether GBP/EUR can return towards 1.1800 or whether the correction extends towards the former breakout area above 1.1600.
