Pound to Euro Exchange Rate Forecast: 1.1875 say Morgan Stanley

March 9, 2025 - Written by Adam Solomon

STORY LINK Pound to Euro Exchange Rate Forecast: 1.1875 say Morgan Stanley

GBP/EUR: Forecasters Back to Square One

During the week the Pound to Euro exchange rate (GBP/EUR) dipped sharply to 5-week lows below 1.19 as the Euro surged.

Danske Bank FX analyst Kirstine Kundby-Nielsen commented, "It's all to do with the broad-based euro optimism that we've seen with this shift in fiscal policy in Germany."

Most investment banks are in the process of re-evaluating FX forecasts given the dramatic economic and geo-political developments this week.

Morgan Stanley now has a GBP/EUR target of 1.1875.

Scotiabank expects strong resistance on any fresh advance to 1.22.

If banks are confident in a Euro re-rating, forecasts of GBP/EUR strengthening to 1.25 this year are likely to be scaled back, but the threat of tariffs on the Euro area will certainly temper Euro optimism.

Uncertainty and volatility will inevitably continue to dominate.

According to Morgan Stanley, the Euro could correct lower initially, but added; “we think that the medium-term positivity of the Europe news, coupled with continued risks to the US that have time to still play out, will inspire investors to buy the dip.”

Euro developments dominated during the week with a particular focus on fiscal policy.

In response to Ukraine developments, including the withdrawal of US military and intelligence support, European countries scrambled for a short-term response and long-term strategy.

Germany announced a jump in defence spending and a huge EUR500bn infrastructure scheme while most European countries continued to back increased defence spending to strengthen security.

Euro yields jumped on the week with the sharpest increase for over 30 years which turbo-charged the Euro and undermined GBP/EUR.

The ECB cut interest rates by a further 25 basis points with the deposit rate at 2.50%.

There are, however, growing expectations of a pause in rate cuts, especially given the fiscal policy shift.

ING commented; “If a major re-weighting of the euro is underway, which could be possible depending on the severity of US tariffs in April, then this will be played out against major trading partners.

Nordea is less confident; “the fiscal and economic outlook remains very uncertain, and Europe could quickly become Trump’s next tariff target.”

UBS expects ECB rate cuts will support the Euro-Zone economy.

As far as the Pound is concerned UBS sees two-sided risks of Bank of England reluctance to cut rates aggressively; “While this hurts economic growth and fuels stagflation risks, it also results in more attractive GBP carry. Hence, on a total return basis we slightly favor the GBP over the EUR.”

On tariffs UBS commented; “US tariffs pose a bigger risk to the EUR than the GBP. We think the market has been too complacent by not pricing in the much-related risk premium.”

The bank did, however, add; “While we do not think UK exports to the US are a focus of the Trump Administration, the GBP remains a highly cyclical currency and will be susceptible to a worsening in global risk sentiment—should a trade war of any kind materialize.

HSBC is sceptical that higher yields will provide sustained Euro support; “If we step back from the fixation on yield differentials, it means the market is buying the EUR because the region now faces a heightened security threat, and is scrambling to find money to reduce that risk.”

It added; “It also faces the prospect of a further headwind to growth from tariffs, one likely to exacerbate a challenging growth/inflation mix. Sometimes yield shifts are not a sufficient reason to buy a currency, if you don’t consider why those yields have moved.”

Deutsche Bank noted the extremely high degree of uncertainty; “We also know from history that when a crisis happens, old assumptions can be upended very quickly, as we’re seeing right now. So if the EU can’t rely on the US security umbrella anymore, it’s plausible that could actually be a positive European growth story as they spend and borrow more for their own defence.”

It added; “But then again, it’s also plausible that a fresh round of tariffs could push back on those gains, meaning that the sclerotic growth of recent years continues.”

It pointed to long-term consequences; “There are just so many moving parts at the moment, but big changes to the global order that will influence markets and economies for years to come are undoubtedly emerging right now.”

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TAGS: Forecasts