Euro Stalls Below Recent Highs as German Survey Data Takes Center Stage, Weakens Against Sterling

The euro traded near 0.85558 against the pound on Monday, with momentum fading after last week's failed attempt to break the 0.8580 area, leaving the pair consolidating in the mid-0.8500 range. Market focus shifts to upcoming German economic survey data, with investors broadly adopting a wait-and-see stance as they await clearer directional signals from fundamentals.

**Geopolitical and Policy Uncertainty Weigh on Euro**

Uncertainty over the Middle East peace process is dampening risk appetite, leaving the euro without fresh directional catalysts. According to ING analysts, the market currently lacks the momentum needed to push the pair through key levels, with EUR/USD expected to remain range-bound near current levels. The European Central Bank's policy meeting next week is expected to hold rates steady by consensus, but rising oil prices have reopened the door to a surprise hike. ING notes that a final round of hawkish-dovish positioning could emerge before the summer recess, with any ECB action more likely to land in September.

**Sterling Faces Political Transition Risk**

On the pound side, the incoming prime minister is expected to formally take office and deliver remarks next week. ING analyst Pesole warned that a government transition arriving while sterling shows signs of short-term overvaluation poses a risk for the currency. Based on ING's short-term fair value model, EUR/GBP remains undervalued by roughly 1.5% against fair levels, with Pesole expecting the pair to recover toward 0.870 by late summer. However, UBS analyst Bolz maintains a positive medium-term view on sterling, supported by a 4.2% carry advantage, though this assessment could face revision if risk aversion reignites or the Bank of England unexpectedly turns dovish.

**Dollar Strength Adds Indirect Pressure**

Sterling's latest pullback is primarily driven by dollar strength, with recent hawkish remarks from Federal Reserve officials. ING views market pricing for cumulative tightening by year-end as overly aggressive, with its base case remaining unchanged rates. Dollar strength is indirectly weighing on EUR/GBP, and with no independent upside catalyst, the pair is likely to keep oscillating around the 0.8550 level in the near term.