The Pound Sterling has rebounded against the Euro, supported by improved market sentiment, with the Pound to Euro (GBP/EUR) exchange rate at 1.1860 on Friday. We expect it could rise further, targeting an initial resistance at 1.1882 over the next day or two, provided global equity markets remain positive. The strong correlation between GBP/EUR and the U.S. S&P 500 index has been a key factor in the Pound's midweek recovery, driven by gains in the stock market.

The European Central Bank’s recent decision to cut interest rates had little impact on the Euro, as it was widely anticipated. In fact, the ECB's balanced guidance and updated forecasts have supported the Euro, as they did not signal an accelerated pace of rate cuts. Economists expect the ECB to continue reducing rates gradually, around once per quarter, providing a stable outlook for the Euro and limiting any further upside for the Pound to the 1.1882-1.19 range.

Looking ahead, central bank policy will take centre stage, with next week’s inflation report posing a key risk for the Pound. We see asymmetric risks for Sterling, with the currency likely to be more sensitive to weaker-than-expected inflation data. While markets anticipate the Bank of England will hold interest rates steady next Thursday, a downside surprise in inflation could raise expectations of future rate cuts, which would weigh on the Pound.