Pound to Euro Jumps to Best Rate in Two Weeks as Inflation Caution Dominates

March 20, 2025 - Written by Tim Boyer

STORY LINK Pound to Euro Jumps to Best Rate in Two Weeks as Inflation Caution Dominates

The Pound to Euro (GBP/EUR) exchange rate advanced to 2-week highs close to 1.1960 from 1.1945 as the Euro lost ground in global markets.

The Bank of England (BoE) decision met strong expectations, but the vote split and relatively hawkish guidance provided net Pound support, especially against the Euro.

Money markets are still pricing in two further cuts this year with the chances of a May move close to 50% while a majority of investment banks expect three cuts.

According to MUFG; “It will become even more uncomfortable for the BoE to keep cutting rates heading into the summer when inflation is expected to temporarily pick up towards 4.0%. Overall, we still believe that the pound remains attractive.”

The Pound to Dollar (GBP/USD) exchange rate rallied to 1.2975 from 1.2960 before a retreat to 1.2950 as the dollar advanced against European currencies, again failing to sustain a move above 1.3000.

There will be further resistance close to 1.3000 and then 1.3045.

According to SocGen; “Beyond 1.3045, next projections would be located at 1.3150/1.3175."

The BoE Monetary Policy Committee (MPC) held interest rates at 4.50% following the latest policy meeting which was in line with strong consensus forecasts.

As far as the vote is concerned, there was an 8-1 vote for the decision with Dhingra voting to cut rates by a further 25 basis points to 4.25%.

There had been speculation that Mann would back a further cut, but she voted with the majority.

Guidance overall was little changed from the previous meeting with comments that; “Monetary policy would need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further.”

Governor Bailey stated that rates were on a gradually declining path, but he emphasised that there was a high degree of uncertainty.

Uncertainty was a dominant theme as, according to the bank, global trade policy has intensified while other geo-political uncertainties have also increased.

Given this element of uncertainty, the committee warned that it will pay close attention to any consequent signs of more lasting inflation pressure.

The bank expects that the inflation rate will peak at 3.75% in the third quarter compared with the previous projection of 3.7%.

According to Morningstar Chief Equity Strategist Michael Field; "In the wake of Trump tariff threats, and inflation spiking once again in the UK to 3%, the slow and steady approach to rate cutting makes sense.”

Following the decision, there was a slight scaling back of expectations surrounding rate cuts this year, but traders are still backing two further cuts.

Socgen expects steady rate cuts; “We maintain our view that the MPC is likely to deliver three more 25bp cuts this year(in May, August and November), as weak consumption growth limits firms’ pricing power to pass on their higher labour costs, while rising unemployment puts downwards pressure on pay growth.”

KPMG Chief Economist Yael Selfin commented; "Recent external developments are also contributing to the uncertain outlook. Downside risks to growth from potential tariffs have increased, while they also pose an upside risk to inflation if sterling weakens, causing higher import costs."

She added; "We expect the Bank to be able to resume cutting interest rates in the upcoming May meeting as it digests the updated forecasts and data over the coming weeks. Overall, we expect base rates to fall to 4% by the end of 2025."

ING expects that next week’s fiscal statement will be more important for the Pound.

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TAGS: Pound Euro Forecasts