Pound to Euro Weekly Forecast: Potential Peak at 1.22 in Q2 2025

March 16, 2025 - Written by David Woodsmith

STORY LINK Pound to Euro Weekly Forecast: Potential Peak at 1.22 in Q2 2025

Foreign exchange analysts at RBC Capital Markets (RBC) expect the Pound to Euro (GBP/EUR) exchange rate will see temporary strength during the second quarter of this year with a potential peak around 1.22.

It expects GBP/EUR selling on rallies with steady losses to 1.1765 by the end of 2025.

The bank also forecasts further losses to 1.11 at the end of next year.

According to the bank US trade tariffs will be crucial in driving GBP/EUR gains; “we think it highly likely the Euro area will be hit by tariffs of the order of ~25% come April. That may be partly, but we would argue, not fully priced in.”

ING also expects temporary GBP/EUR gains on tariff developments; “We should see the US announce some significant tariffs on 2 and 3 April. EUR/GBP normally gets hit on tariff news given the UK’s smaller goods exposure to the US when compared to the eurozone’s large and problematical trade surplus with the US.”

The potential for a quantum leap in German fiscal policy is continuing to have a substantial impact.

Rabobank expects net GBP/EUR gains, but has lowered its end-2025 GBP/EUR forecast to 1.2050 from 1.2270 previously.

According to Rabobank; “the dynamics for EUR/GBP have been altered by the news from the German coalition-to-be last week.”

On Friday, there were reports that the CDU and CSU had reached a deal with the Greens on the fiscal stimulus and GBP/EUR dipped to 1.1870 amid another round of Euro buying.

HSBC commented; “We cannot ignore when the facts change, especially when they relate to politics, as this channel can impact FX in a big way. The FX market may be in danger of overdoing its optimism on what fiscal changes in Europe might mean for growth and the ECB policy path, but (assuming the necessary legislation is implemented) there has clearly been a big shift in Europe’s stance.”

HSBC had forecast that GBP/EUR would reach 1.2120 by year end but has lowered this to 1.1825

UBS also expects a substantial impact; “After years of underinvestment, plans to increase German government spending and reform the debt brake have the potential to improve the investment outlook domestically and for the wider region.”

There are still important concerns surrounding the potential for US trade tariffs.

UK GDP contracted 0.1% for January after 0.4% growth for December and compared with consensus forecasts for 0.1% growth.

ING put the monthly data in perspective; “Higher government spending should lead to reasonable growth through 2025. Whether that’s enough to avert tough decisions for the Treasury, we’re not so sure.”

It added; “The problem for the Treasury is that its independent forecaster, the Office for Budget Responsibility, has been far too optimistic on 2025 growth. Its 2% forecast looked wildly optimistic even when it was announced back in October. The truth is likely to be more like half that.”

Goldman Sachs commented; “While we continue to think the conditions are in place for gradual Sterling outperformance versus the Euro and its satellites, this week’s pick-up in gilt yields in sympathy with German yields complicates the risk-reward for Sterling longs ahead of the Spring Budget on March 26.”

HSBC maintains a cautious stance towards the UK economy; “The UK faces other challenges. Economic growth continues to stagnate and government faces fiscal constraints. Sticky wage growth and services inflation have kept monetary policy restrictive but, with weakness in labour market data showing up in surveys, the risks around the BoE’s cutting cycle are tilted to the downside.

It added; “In other words, the broader growth/inflation dynamics do not look positive for GBP. Finally, GBP tends to underperform in periods of high uncertainty.”

RBC expects quarterly BoE interest rate cuts which should underpin the Pound on yield grounds, but it notes structural headwinds; “GBP remains overvalued on a REER basis, particularly based on unit labour cost measures for the real effective exchange rate.”

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TAGS: Currency Predictions Pound Euro Forecasts