Pound Sterling’s GDP-driven gains face a policy test as ING expects no Bank of England hike, while the ECB’s inflation outlook points towards further tightening.
The Pound to Euro (GBP/EUR) exchange rate ended the trading week near 1.1663, up 0.24% on the day, however analysts at ING still expect a retreat towards 1.15 in Q4 2026.
Its end-of-year Euro-Pound target of 0.87 converts to approximately 1.1494 GBP/EUR, around 1.4% below Friday’s close.
July’s growth surprise has therefore lifted Pound Sterling without persuading ING to abandon its cautious forecast.
The ONS recorded 0.4% monthly GDP growth after June’s 0.3% increase, with services, production and construction all expanding.
Yet consumer-facing services contracted 0.4%, showing that the improvement was uneven.
As our coverage of Friday’s GDP reaction highlighted, analysts disagree over how much pressure stronger activity puts on the Bank of England.
ING’s Francesco Pesole acknowledges the immediate currency response:
“GBP is a tad stronger on the back of that, but these monthly growth prints have not had much impact on BoE decisions.”
The interest-rate gap behind ING’s forecast
On Friday morning, ING put market expectations at 48 basis points of tightening by year-end and 110 basis points by July 2027.
The year-end figure amounts to almost two quarter-point increases.
“Our baseline is still that the Bank of England won’t hike at all, leaving sterling in front of a potential cliff-edge dovish repricing.”
At Exchange Rates UK Research we believe that gap explains why a positive growth release can coexist with a weaker Pound Sterling forecast: if investors remove anticipated hikes, GBP loses some of its expected yield support.
The Euro side also matters. Thursday’s ECB decision announced a quarter-point increase in the deposit rate to 2.50%, effective from 16 September.
Its projections put inflation at 2.5% in 2027 and 2.1% in 2028, above the 2% target in both years.
ING sees those projections as an argument for additional increases:
“Taken at face value, those forecasts already pointed to further tightening.”
The ECB itself has committed to assessing policy meeting by meeting, so further hikes remain conditional.
ING nevertheless retains its fourth-quarter currency calls:
“We continue to see upside room for EUR/GBP and downside for GBP/USD, with 4Q targets of 0.87 and 1.33.”
The main risk to that outlook is stronger UK inflation persuading the BoE to tighten after all, allowing Sterling to retain more of its interest-rate support.
Our currency coverage draws on live market data, official economic releases and published bank research.
