– Written by
Frank Davies
STORY LINK Pound to Euro Forecast: GBP Outlook Weakens as Rally Pauses
The Pound to Euro exchange rate (GBP/EUR) has slipped back below 1.1700 after failing to extend Monday’s advance to two-week highs.
Pound Sterling continues to benefit from its substantial yield advantage and benign carry-trade conditions, but with political risks temporarily subdued and major UK data absent, the Pound is struggling to find the fresh catalyst required for another move higher.
GBP/EUR Forecasts: Retreats from 2-Week Highs
After hitting 2-week highs near 1.1715 on Monday, the Pound to Euro (GBP/EUR) exchange rate drifted lower on Tuesday and traded just below the 1.17 level. The Euro was able to resist any further selling interest during the day while markets overall were in the Summer doldrums.
GBP/EUR is still well below the 14-month highs of 1.18 recorded in July.
Overall risk appetite held steady with low volatility encouraging further interest in carry trades. UK equities reversed initial losses to trade slightly higher.
UBS commented; “Markets are really just in a period of digestion and wait-and-see.”
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As far as data is concerned, there are no major UK releases until the second-quarter GDP figures on Thursday.
The latest unemployment and inflation data are due for release next week while Wednesday’s US inflation data will have an impact on wider risk sentiment.
UK short-term interest rates remain 150 basis points higher than the Euro which will continue to attract Pound buyers in the near term.
Similarly, there is also a substantial yield pickup at the 10-year area with UK yields still close to 5.00% even with a retreat to 4.96% on Tuesday.
Higher yields, however, will also maintain concerns over the UK fiscal and debt profile, especially given the burden of high debt-interest payments.
In this context, fiscal policy will inevitably never be far from the headlines.
Rabobank; “in view of the high level of UK public debt, slow growth and the discipline implied by the fiscal rules, it is likely that there will be political friction in the approach to the autumn budget. Welfare reform could again be a lightning rod for tension within the Labour party, as it was for former PM Starmer in 2025. This has the capacity to unsettle both the gilts market and the pound.”
Scotiabank is broadly positive on the short-term outlook; “Price action continues to be driven by sentiment as we note the GBP’s tight correlation to risk reversals, which continue to fade their premium for protection against downside movement.”
It added; “The recovery is important, reflecting an overall improvement in the market’s assessment of UK (specifically political) risk and offers scope for further near -term strength for the pound.”
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TAGS: Pound Euro Forecasts
