Euro-Pound Tipped To Rise Towards 0.89 Over The Next 9-12 Months

The Euro to Pound exchange rate (EUR/GBP) is trading near 0.8650, having edged lower from February’s highs above 0.8780 but remaining comfortably above the lows seen last summer.

Foreign exchange analysts at Rabobank believe the balance of risks now favours a gradual move higher, targeting 0.89 over the next 9-12 months as the Pound faces both economic and political headwinds.

Rabobank notes that Sterling initially benefited from the sharp repricing of Bank of England expectations after the Iran conflict, when markets swung from pricing rate cuts to anticipating rate hikes. However, that support has faded.

“The market has rowed back on its previous more aggressive BoE rate hike forecasts and Rabobank expects the BoE to hike just once this year to keep inflation expectations anchored.”

The bank argues that softer UK labour market data points to increasing spare capacity in the economy, reducing the risk of the persistent inflation pressures seen during the 2021-22 energy crisis.

As a result, the Pound has lost some of its interest-rate support relative to other major currencies.

Politics is now becoming an increasingly important factor for Sterling.

Rabobank highlights that “the poor showing for the Labour party in the May local elections in England and parliamentary elections in Wales and Scotland” has revived concerns over Prime Minister Keir Starmer’s position.

The bank believes uncertainty could persist well into the summer, noting that “it would appear very likely that political uncertainty will drag on through the summer.”

Rabobank also warns that a leadership change may not necessarily reassure investors.

“Given the revolving door of PMs that the UK has experienced in recent years, it is not difficult to conclude that a new Labour leader may also fail to bring unity in government and certainty with respect to policy direction in the UK.”

The prospect of Andy Burnham emerging as a leadership contender is another factor under consideration.

While Burnham has pledged to stick to current fiscal rules, Rabobank notes that “Burnham’s policies of increased public intervention imply the potential for an even higher tax burden to support spending plans. This could worry investors.”

Overall, the bank notes that “GBP may continue to carry a political penalty for some time” and maintains its forecast that “EUR/GBP will edge towards the 0.89 level on a 9-to-12-month view.”

Rabobank’s outlook is among the more bearish Pound Sterling forecasts in the market.

Its 0.8930 target is similar to euro to pound exchange rate projections from Scotiabank, SEB, Citi and Danske Bank, all of which see EUR/GBP moving towards the 0.89-0.90 region.

By contrast, banks such as UBS, Bank of America and Pantheon Macro remain considerably more optimistic on the Pound, forecasting EUR/GBP closer to 0.84-0.86 over the coming year.