Pound to Euro Week Ahead Forecast: EU Trump Tariffs Ahead?

February 9, 2025 - Written by Tim Boyer

STORY LINK Pound to Euro Week Ahead Forecast: EU Trump Tariffs Ahead?

Currency forecasters at UBS predict that the Pound to Euro exchange rate (GBP/EUR) could strengthen to 1.22 at the end of 2025.

ING expects a limited GBP/EUR retreat to 1.19 with underlying Euro vulnerability limiting losses.

There were major events during the week, although GBP/EUR moves were relatively controlled with net gains to 1.2050.

The Pound and Euro were both damaged when President Trump announced tariffs on Canada and Mexico before regaining territory after a 30-day delay.

There were still strong expectations of action against the EU.

According to UBS; “we remain skeptical that this is the start of a turnaround, because Trump has not targeted Europe yet, but we expect this to happen shortly. So, we have seen initial green shoots, but we think it is too early to call this a recovery. With German elections just two weeks away, political risks could hurt the euro as well as any US tariff action.”

Bank of America notes the risks to the Pound from global trade tensions, but added; “we are constructive on GBP largely because other currencies – EUR in particular – are facing even more challenging headwinds.”

The Bank of England cut interest rates by 25 basis points to 4.50% at the latest policy meeting.

This was in line with strong consensus forecasts, but there was a surprise in the split.

There was a 7-2 vote for the decision with Dhingra and Mann backing a larger 50 basis-point rate cut.

Mann’s U-turn was particularly surprising given her inflation concerns.

The 2025 GDP growth forecast was halved to 0.75% from 1.5% previously, but there were upgrades to 2026 and 2027. In contrast, the bank expects inflation to jump to near 4% this year before a gradual retreat.

Overall, the BoE sees scope for further gradual and cautious cuts.

The forecasts increased concerns over the stagflation risk. Markets see the most likely outcome at three further rate cuts this year with downside risks.

Danske Bank commented; “We expect the next 25bp cut in May with the Bank Rate ending the year at 3.75%. However, we highlight that the risk is skewed towards a swifter cutting cycle in 2025, given the clearly dovish bias within the MPC as evident from today's vote split and communication.”

According to ING; “The Bank of England's latest decision, which saw two members vote for a more aggressive rate cut, has caught markets slightly off-guard. But the overall message is a gradual one and we're sticking to our call of four rate cuts in total this year.”

MUFG considers that rate cuts may help underpin confidence. It noted; “The BoE cutting rates more than expected in theory should mean GBP underperformance. But given the risks associated with the sustainability of fiscal policy, falling yields will ease those concerns and curtail negative implications for GBP.”

On the Pound, UBS added; “rate differentials against peers such as the EUR and CHF should remain high, lending some carry-related support for investors.

According to MUFG the bond market should be resilient; “We understand there are some increased risks for Gilts given the UK must compete with many other developed economies who are also running large deficits. But the UK government has made efforts to tackle this.”

It added; “we do not see a crisis-type scenario that would see GBP suffer notably.”

MUFG forecasts that GBP/EUR will end the year at 1.2050.

Confidence in the Euro-Zone economy remains fragile. German industrial production declined for December, but there was a jump in industrial orders.

ING commented; “The eurozone economy stagnated in the fourth quarter of 2024. There are some signs of stabilisation, but a significant recovery seems unlikely due to potential trade conflicts with the US.”

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TAGS: Currency Predictions Pound Euro Forecasts