In the UK, inflation rose from 2.6% to 2.9% in July<\/strong>, but the underlying detail was less worrying than the headline suggests. The main driver was the rise in household energy costs after the Ofgem price-cap increase. Core inflation held at 2.6%<\/strong>, while services inflation eased from 3.6% to 3.4%<\/strong>. That suggests inflation pressure in Britain is rising more from the external energy shock than from a fresh reacceleration in domestic inflation.<\/p>\n\n\n\n That matters because it gives the Bank of England more room to look through the move if it believes the pressure is not spreading meaningfully through the wider economy.<\/p>\n\n\n\n The euro-area picture is a little less comfortable.<\/p>\n\n\n\n Euro-area inflation was also confirmed at 2.9%<\/strong>, up from 2.8% previously. But the internal details show slightly firmer persistence. Energy remains a major driver, yet services inflation also edged higher and core inflation has shown less improvement than the UK equivalent. In other words, the euro area looks a touch stickier beneath the surface.<\/p>\n\n\n\n That leaves us with the key FX question:<\/p>\n\n\n\n Which side is seeing the more inflationary backdrop, and which central bank is likely to face the firmer policy pressure?<\/strong><\/p>\n<\/blockquote>\n\n\n\n For now, the answer leans towards the euro area.<\/p>\n\n\n\n This is where our first chart becomes important.<\/p>\n\n\n\n The German 2-year minus UK 2-year yield spread<\/strong> has been trending higher. The spread is still negative, which means UK 2-year yields remain above German 2-year yields in absolute terms. But the direction is what matters most.<\/p>\n\n\n\n A move from around -1.85% towards -1.52%<\/strong> tells us that German 2-year yields are rising relative to UK 2-year yields<\/strong>.<\/p>\n\n\n\n That means the UK\u2019s short-end yield advantage is narrowing.<\/p>\n\n\n\n For EUR\/GBP, that is a useful confirmation signal because the 2-year maturity is much more sensitive to ECB versus BoE policy expectations<\/strong> than the 10-year end of the curve. So this chart is not just showing a general rates move. It is showing that markets are beginning to lean slightly more towards the euro on a relative policy basis.<\/p>\n\n\n\n That creates a cleaner cause-and-effect chain:<\/p>\n\n\n\n Euro-area inflation looks a little stickier than UK inflation<\/strong><\/p>\n\n\n\n \u2193<\/p>\n\n\n\n Markets price relatively firmer ECB expectations<\/strong><\/p>\n\n\n\n \u2193<\/p>\n\n\n\n German 2-year yields rise relative to UK 2-year yields<\/strong><\/p>\n\n\n\n \u2193<\/p>\n\n\n\n Sterling\u2019s rate advantage narrows<\/strong><\/p>\n\n\n\n \u2193<\/p>\n\n\n\n EUR\/GBP finds support<\/strong><\/p>\n<\/blockquote>\n\n\n\n That is a much stronger macro narrative than simply saying \u201cEurope CPI was hotter, so EUR\/GBP should rise\u201d.<\/p>\n\n\n\n For the bullish EUR\/GBP view to continue, we would want the next batch of data to keep reinforcing the same divergence.<\/p>\n\n\n\n On the euro-area side, the bullish case is strengthened if:<\/p>\n\n\n\n On the UK side, the bullish EUR\/GBP case is strengthened if:<\/p>\n\n\n\n So the market will now be watching whether this relative inflation gap keeps feeding into the short-end rate differential.<\/p>\n\n\n\n If it does, the fundamental story continues to support EUR\/GBP upside.<\/p>\n\n\n\n If it does not, and UK data begin re-accelerating again, then sterling could quickly regain support.<\/p>\n\n\n\n That is the key risk to the idea.<\/p>\n\n\n\n If the next run of UK data shows that the energy shock is bleeding back into wages, services and broader domestic pricing pressure, markets could start re-pricing the BoE more aggressively again. In that case, UK 2-year yields could stabilise or outperform, and the EUR\/GBP bullish narrative would weaken.<\/p>\n\n\n\n The price action is lining up with the macro story quite well.<\/p>\n\n\n\n On the 4-hour chart, EUR\/GBP has been consolidating in what looks like a\u00a0bull flag<\/a><\/strong>\u00a0after its sharp rebound from the July lows. Price is now working its way back towards the upper boundary of that structure.<\/p>\n\n\n\n Momentum is also supportive.\u00a0RSI<\/a> is holding above 60<\/strong>, which suggests bullish momentum is still present without the pair being excessively stretched.<\/p>\n\n\n\n That matters because it tells us the market is not simply drifting higher. There is still some constructive momentum behind the move.<\/p>\n\n\n\n\n
The bond market is starting to confirm it<\/h2>\n\n\n\n
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What needs to happen next to keep the narrative alive?<\/h2>\n\n\n\n
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Technical picture: bull flag still in play<\/h2>\n\n\n\n
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