{"id":440524,"date":"2026-10-21T13:40:05","date_gmt":"2026-10-21T06:40:05","guid":{"rendered":"https:\/\/www.swingfish.trade\/blog\/market-news\/gbp-eur-surge-can-the-rally-continue-440524\/"},"modified":"2026-10-21T13:40:05","modified_gmt":"2026-10-21T06:40:05","slug":"gbp-eur-surge-can-the-rally-continue","status":"publish","type":"post","link":"https:\/\/www.swingfish.trade\/blog\/market-news\/gbp-eur-surge-can-the-rally-continue-440524\/","title":{"rendered":"GBP\/EUR Surge: Can the Rally Continue?"},"content":{"rendered":"
\n

Sterling has
\n strengthened against the euro as expectations of higher UK interest rates
\n collide with growing uncertainty across European financial markets. On October
\n 20, the pound reached its strongest level against the single currency since May
\n 2025, with the exchange rate trading around 83.95 pence per euro (after a low
\n at around 83.89). The currency was mostly supported by UK labour-market data
\n that reinforced expectations of a Bank of England (BoE) rate increase on
\n November 5.<\/p>\n

EUR\/GBP<\/a>
\nDaily Chart – Source: TradingView<\/p>\n

However, the pound’s
\nadvance is not simply a reflection of improving UK economic fundamentals.
\nPolitical unrest in France, rising European sovereign borrowing costs and
\nsurging energy prices are also shaping currency markets. With money markets
\nalmost fully pricing in a 25-basis-point BoE rate hike, the key question is
\nwhether sterling can extend its gains or whether expectations have already gone
\ntoo far.<\/p>\n

BoE Rate-Hike
\nExpectations Support Sterling, but the Labour Market Sends Mixed Signals<\/p>\n

The latest UK
\nemployment figures have strengthened the case for monetary tightening, although
\nthey do not provide an unequivocal signal that the economy can withstand a
\nprolonged cycle of rate increases.<\/p>\n

Annual growth in
\nregular wages reached 3.7% in the three months to August, exceeding economists’
\nexpectations of 3.6%. The unemployment rate also edged down to 4.7%, its lowest
\nlevel since mid-2025, while preliminary payroll estimates suggested that employment
\nconditions may be stabilising. These developments followed a run of
\nstronger-than-expected UK economic data.<\/p>\n

\n

Employment Rate and Wage Growth in the UK – Source: Reuters<\/p>\n

For the BoE, the
\ncombination matters because persistent wage growth can contribute to domestic
\ninflation, particularly if labour costs remain elevated. If policymakers
\nbelieve that inflation will stay above their 2% target for longer than
\nexpected, tighter monetary policy may be necessary.<\/p>\n

Markets have responded
\naccordingly. Money-market futures were almost fully pricing in a 25-basis-point
\nincrease at the November 5 meeting, which would lift the Bank Rate from 3.75%
\nto 4%. Investors were also anticipating further increases into 2027, although
\nexpectations for a sustained tightening cycle remain less certain.\u00a0<\/p>\n

Higher expected UK
\ninterest rates can support sterling by improving the relative return available
\non pound-denominated assets. However, the latest employment report contains an
\nimportant counterpoint.<\/p>\n

The number of
\nvacancies fell to 691,000 in the July-to-September period, its lowest level
\noutside the pandemic era since 2014. The decline suggests that businesses,
\nparticularly smaller firms facing higher employment costs, remain reluctant to
\nrecruit. The Office
\nfor National Statistics<\/a> also reported that payroll employment remained
\nweaker than a year earlier.\u00a0<\/p>\n

This creates a gap
\nbetween market expectations and the underlying economic picture. Wage growth
\nand falling unemployment strengthen the argument for a November rate increase,
\nbut declining vacancies point to fragile labour demand.<\/p>\n

The data therefore
\nprovide a stronger case for a possible near-term hike than for assuming that
\nseveral additional increases will necessarily follow. If the BoE raises rates
\nas expected but signals caution about subsequent decisions, some of sterling’s
\nmonetary-policy support could fade.<\/p>\n

European Political
\nTurmoil Adds to the Euro’s Vulnerability<\/p>\n

Sterling is also
\nbenefiting from pressure on the euro, as investors reassess the political and
\nfiscal outlook across Europe.<\/p>\n

France has become a
\nparticular source of concern. Renewed demonstrations and unrest have added to
\nuncertainty surrounding the government’s ability to pass its 2027 budget and
\naddress the country’s sizeable deficit. At the same time, French government bond
\nyields have approached levels last seen in 2002, while the spread between
\nFrench and German 10-year yields has widened significantly.\u00a0<\/p>\n

These developments
\nmatter for the single currency because persistent sovereign bond-market stress
\ncan undermine confidence in the eurozone’s economic and financial stability. If
\ninvestors begin to demand higher risk premiums across several member states,
\nconcerns about financial fragmentation could intensify. Of course, France’s
\ndifficulties should not be treated as an automatic signal of a wider eurozone
\ncrisis. The implications for the single currency will depend on whether
\npolitical and fiscal pressures remain concentrated in France or spread to other
\nEuropean markets.<\/p>\n

For the GBP\/EUR, the
\ndistinction is important. Sterling can appreciate because investors become more
\nconfident in the UK outlook, because they become less confident in the
\neurozone, or through a combination of both.<\/p>\n

The Oil Shock Could
\nComplicate the BoE’s Next Move<\/p>\n

The Middle East
\nconflict introduces another variable that could reshape the outlook for
\nsterling and the euro: energy prices.<\/p>\n

Brent<\/a> crude climbed
\nabove $111 per barrel on October 20, reaching its highest level since May, amid
\npersistent disruption risks around the Strait of Hormuz and limited progress
\ntowards ending the conflict. The prospect of further interruptions to energy
\nshipments has kept markets concerned about supply and inflation.<\/p>\n

Daily UK Oil Chart – Source: ActivTrades<\/p>\n

For the UK, higher oil
\nand gas prices could push inflation higher through transport, household energy
\nbills and business costs. If these pressures persist, the BoE may face greater
\ndifficulty bringing inflation back towards its 2% target, strengthening the
\nargument for higher interest rates.<\/p>\n

That could initially
\nsupport sterling, particularly if investors expect the BoE to tighten policy
\nmore aggressively than the European Central Bank (ECB). Yet the relationship
\nbetween energy prices, interest rates and currencies is not straightforward.<\/p>\n

Higher energy costs
\nalso reduce households’ disposable income, squeeze corporate margins and
\npotentially weaken economic growth. If the shock becomes sufficiently severe,
\nmarkets could begin to question whether further monetary tightening would
\ndamage the UK economy rather than simply contain inflation.<\/p>\n

The BoE has already
\nwarned that prolonged energy-price volatility could make inflation more
\npersistent and increase the likelihood of further tightening. Its September
\ndecision left Bank Rate at 3.75%, while acknowledging the risks arising from
\nthe conflict.\u00a0 The ECB faces a similar dilemma, although the consequences
\ndiffer according to each economy’s exposure to energy imports, inflation
\ndynamics and fiscal position.<\/p>\n

The key risk for
\nsterling is therefore that the energy shock initially supports rate-hike
\nexpectations but eventually undermines the growth outlook. If markets begin to
\nfocus more heavily on the economic damage, the pound could lose some of its
\ncurrent advantage.<\/p>\n

Can GBP\/EUR Extend Its
\nRally?<\/p>\n

The outlook for the
\nGBP\/EUR will depend on whether the BoE delivers the expected rate increase and
\nhow policymakers assess the risks beyond November. Three scenarios stand out.<\/p>\n

Sterling could extend
\nits gains if UK inflation remains persistent, the BoE raises rates and French
\npolitical uncertainty continues to weigh on the euro. A further widening in
\nexpected UK-eurozone interest-rate differentials could provide additional support,
\nalthough much will depend on how much tightening is already reflected in market
\nprices.<\/p>\n

The currency pair
\ncould consolidate if the November hike is delivered but the BoE signals that
\nsubsequent decisions will depend on incoming data. With vacancies falling and
\nhiring demand remaining weak, policymakers may be reluctant to validate
\nexpectations of a prolonged series of increases. If European market tensions
\nalso ease, sterling’s relative advantage could diminish.<\/p>\n

The euro could recover
\nif energy prices retreat, political risks in Europe subside or markets reassess
\nthe expected pace of UK monetary tightening. A deterioration in British growth
\nprospects could also undermine sterling, particularly if higher energy costs
\nsqueeze household spending and corporate profitability.<\/p>\n

For traders, the
\ndistinction between the expected November decision and the outlook for rates in
\n2027 is important. A widely anticipated rate increase may provide limited
\nadditional support if it is already priced into the GBP\/EUR evolution. Future
\nprice movements could depend more on the BoE’s guidance, inflation data and
\ndevelopments in the Middle East.<\/p>\n

Sources: Reuters, The Wall Street Journal, ONS, Bank
\nof England, Yahoo Finance<\/p>\n

\u00a0<\/p>\n

The information
\nprovided does not constitute investment research. The material has not been
\nprepared in accordance with the legal requirements designed to promote the
\nindependence of investment research and as such is to be considered to be a
\nmarketing communication.<\/p>\n

\u00a0<\/p>\n

All information has
\nbeen prepared by ActivTrades (\u201cAT\u201d). The information does not contain a record
\nof AT\u2019s prices, or an offer of or solicitation for a transaction in any
\nfinancial instrument. No representation or warranty is given as to the accuracy
\nor completeness of this information.<\/p>\n

\u00a0<\/p>\n

Any material
\nprovided does not have regard to the specific investment objective and
\nfinancial situation of any person who may receive it. Past performance is not a
\nreliable indicator of future performance. AT provides an execution-only
\nservice. Consequently, any person acting on the information provided does so at
\ntheir own risk. Forecasts are not guarantees. Rates may change. Political risk
\nis unpredictable. Central bank actions may vary. Platforms\u2019 tools do not
\nguarantee success.<\/p>\n<\/p>\n

This article was written by IL Contributors at investinglive.com.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"

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