The Pound to Euro (GBP/EUr) exchange rate has been broadly resilient during the Iran war and is currently trading around 1.1565 after hitting tough resistance close to 1.16.
RBC Capital Markets expects that the conflicting forces of carry trades and risk conditions will be a key underlying factor. After initial losses, RBC sees scope for slight gains to 1.1630 by the end of this year before a retreat to 1.1240 at the end of 2027.
In the near term, RBC notes that there are significant Pound risks from the Iran war with high yields offset by a slide in risk appetite.
It also considers that political concerns will increase again ahead of the May local elections with Prime Minister Starmer facing a key test.
RBC considers that the Pound can find a relative sweet spot late in 2026 with relatively high yields helping to underpin the currency.
Looking at the overall economy, however, the bank considers that the labour market is significantly weaker than seen in 2022. In this context, it expects inflationary pressures will be contained which will limit the need for any interest rate hikes by the Bank of England.
