Barclays Sees Pound's Upside Potential Against Euro Despite Overbought Conditions

Barclays anticipates further gains for the British pound against the euro, despite recent overbought conditions. The pound-to-euro exchange rate has been boosted by widening French bond spreads, which continue to support sterling even as it faces upcoming budget challenges in the UK later this month.

The pound has retraced from Monday's highs near 1.1820, a move exacerbated by thin liquidity in Asian markets. The daily chart shows the pair significantly stretched, with the RSI above 70, indicating overbought conditions. Barclays suggests a settling in the mid-to-late 1.17 range in the near term, though the overall setup favors further upside.

The euro's appeal as an 'anti-dollar' alternative has weakened, particularly due to the sharp widening of French OAT spreads last week. This has increased the cost of government borrowing in France at a time when fiscal challenges are already significant. The upcoming French presidential election and a hung Parliament add to the complexity of addressing these issues.

In the UK, the upcoming budget presents its own risks, with concerns that Prime Minister Andy Burnham may attempt to increase spending without adequate fiscal tightening. The contrast between France's fiscal struggles and the UK's relative stability has made the pound a key beneficiary of recent market movements. Barclays maintains that French developments will remain the primary driver for the EURGBP exchange rate.

Pound Sterling Live's House View from August remains intact, predicting that the pound will end the year higher. The UK economy's resilience has been a key factor in this outlook, though the French situation has accelerated pound-to-euro upside and pressured pound-to-dollar via safe-haven flows. The possibility of an early election called by Burnham based on favorable poll ratings remains a wildcard scenario.