Pound to Euro Forecast: Strengthen to 1.2350 in Next Six Months

February 23, 2025 - Written by Frank Davies

STORY LINK Pound to Euro Forecast: Strengthen to 1.2350 in Next Six Months

Foreign exchange analysts at Danske Bank expect the Pound to Euro exchange rate (GBP/EUR) will strengthen to 1.2350 on a 6-month view as the Euro area remains under pressure.

ING, however, expects a retreat to 1.19 by the end of the third quarter as the Bank of England cuts more aggressively.

GBP/EUR secured a net gain to 1.2080 during the week and close to 2025 highs.

In the weekend German elections, there are strong expectations that the CDU will be the largest party, but a strong AfD performance would make it even more difficult to form a coalition.

UK data was mixed, but with further hints of stagflation - persistent inflation combined with weak growth.

Headline inflation was stronger than expected at 3.0% from 2.5% and above consensus forecasts of 2.8% while the underlying rate increased to 3.7% from 3.2%.

Wages data was slightly stronger than expected with markets considering that the Bank of England would delay any further rate cut until May.

There was a strong increase in retail sales for January, but the PMI business confidence data indicated subdued growth, an on-going manufacturing recession and strong upward pressure on costs.

Geo-political concerns, a lack of fiscal headroom, and strong pressure to increase defence spending illustrated underlying budget pressures.

There was a government surplus for January on seasonal grounds, but the 10-month deficit increased to £118.2 billion from £106.6bn the previous year.

CIBC notes underlying stresses; “the acknowledgement of the eradication of fiscal headroom risks either spending cuts or tax hikes. We view the former as more likely, supporting the notion of a negative output gap.”

ING is also uneasy over the outlook; “the domestic story looks sterling negative. The chancellor is threatened with breaching the government’s fiscal rule if growth forecasts are cut. Thus tighter fiscal policy in March could be a catalyst for more BoE easing to be priced in.”

Danske Bank expects gradual rate cuts; “Our base case of a continuous gradual easing cycle is further amplified by the expansionary fiscal stance. We continue to expect the BoE to deliver the next 25bp cut in May and deliver quarterly rate cuts at the meetings associated with updated economic projections.”

CIBC still expects positive forces will prevail; “Presumptions of immediate fiscally inspired headwinds are likely to be drag on near term GBP sentiment. However, the prospect of graduated policy easing, supporting consumption and growth will prove to benefit GBP performance.”

Danske Bank commented, “We stay positive on GBP FX on the back of a relatively hawkish BoE and a growth pickup in the UK relative to the euro area in 2025.”

It did, however, add; “The UK runs a large current-account deficit, which makes GBP vulnerable when capital inflows fade; this keeps GBP at risk vs EUR in the wake of souring global risk appetite.”

Trade policy will also remain a key element with the threat of US tariffs on imports from the EU.

ING commented, “Internationally, it’s all about trade, and the EU is seen as far more exposed than the UK when it comes to Trump’s trade war. The UK’s goods exports are reasonably small and it’s helpful that the UK actually runs a trade deficit with the US.”

CIBC expects Euro resilience despite the trade threat; “However, tariff risks notwithstanding we are increasingly of the view that the market has already discounted a multitude of EUR negatives, hence we remain mindful of material EUR downside risks proving contained.”

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TAGS: Currency Predictions Pound Euro Forecasts