Pound to Euro Week Ahead Forecast: GBP/EUR to Gain on Trump's Tariffs?

February 2, 2025 - Written by David Woodsmith

STORY LINK Pound to Euro Week Ahead Forecast: GBP/EUR to Gain on Trump's Tariffs?

Foreign exchange analysts at Bank of America still forecast that the Pound to Euro exchange rate (GBP/EUR) will strengthen to 1.25 at the end of 2025.

In contrast, ING forecasts that Pound Sterling (GBP) will retreat to 1.1765 against the Euro (EUR) currency.

Pound Sterling secured a net gain to around 1.1950 during the week amid further concerns over the Euro-Zone outlook with no major UK developments.

The US tariff developments will be a key near-term focus.

On February 1st President Trump announced 25% tariffs on goods from Canada and Mexico with a lower 10% duty on Canadian oil.

Trump used the International Emergency Economic Powers Act (IEEPA) to impose tariffs from February 4th.

Trump also promised that 25% tariffs would also be applied to the EU.

There is still a high degree of uncertainty given the potential for negotiations and legal challenges.

If, however, tariffs go ahead for a sustained period, there will be a negative impact on the Euro area and UK economies.

Berenberg Chief Economist Holger Schmieding commented; "For Europe, this is a mild negative in the sense that (Canada's) negotiations with Trump did not yield a last-minute result and the European response has been to negotiate.”

Most investment banks consider that the EU is more vulnerable.

Bank of America (BoA) commented; “Crucially, the UK runs a trade deficit with the US, including a small deficit in the goods balance, which is the focus of "regular tariffs.” This leaves the Eurozone's exports, heavy on autos and machinery, more exposed than those of the UK.”

It added; “We therefore like selling the upside above 0.8570 over the initial phases of the likely tariff impact.” (Buying GBP/USD on any dips to around 1.1670)

BoA also injected a note of caution; “tariffs could weigh further on EUR but bearishness getting stretched.”

According to Lloyds Bank; “The reality is that the challenges Europe faces have not disappeared and although sentiment might have steadied, the starting point is brittle.”

It added; “Increasing global trade frictions also reminds that the euro looks on the expensive side when measured on a real effective exchange rate basis.”

The ECB lowered the deposit rate by 25 basis points to a 22-month low of 2.75% which was in line with consensus forecasts.

Bank President Lagarde stated that the Euro-Zone economy will remain weak in the short term with risks still biased to the downside, but there is scope for a rebound later in the year.

According to flash data, Euro-Zone GDP was unchanged in the fourth quarter of 2024 compared with expectations of a 0.1% increase for the quarter with a 0.2% contraction for Germany.

Wells Fargo commented; “We see downside risk to our moderate Eurozone 2025 GDP growth forecast of 0.9%. Even with some lingering inflation pressures, the modest growth backdrop means ECB policymakers continue to signal easier monetary policy ahead.”

The UK economic outlook and bond market will be a key short-term influence.

Yields have stabilised and the Bank of England announced a new tool to support the bond market if stresses intensify.

According to ING; “While these efforts to restore confidence are very welcome – and have helped the sterling trade-weight index recover about 1% from lows earlier this month – we still feel sterling is vulnerable.”

There are very strong expectations that the BoE will cut interest rates to 4.50% at this week’s policy meeting.

The pace of rate cuts over the remainder of the year will be a key element.

ING added; “Fiscal consolidation in March and a drop in services inflation through the second quarter should lead to a 100bp BoE easing cycle this year. This compares to just 68bp of easing priced by the market today.

UBS expects rate differentials will be important; “the BoE is easing policy from a tight level, meaning that the existing rate differentials should continue to support total returns via the carry component. We also see EURGBP spot risks as skewed a little lower over time to 0.82 by year-end. (1.22 for GBP/EUR)

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TAGS: Currency Predictions Pound Euro Forecasts