EUR/GBP Seen Rising Toward 0.89

GBP/EUR year-ahead forecast: Median, range and upside/downside risks based on projections from 20+ investment banks and FX analysts.View forecasts

The Euro to Pound exchange rate traded near 0.8656 on Tuesday, with the pair holding close to recent lows after sterling outperformed the single currency during the past week.

Since late February, the pound has ranked among the stronger G10 currencies while the euro has lagged near the bottom of the performance table.

Rabobank says this relative strength reflects fading expectations of a near term Bank of England rate cut and a degree of short covering in sterling positions.

Recent market sentiment has also improved slightly following remarks from US President Trump suggesting the Middle East conflict could be nearing an end.

Even so, the euro has struggled to regain ground against major peers while the pound has continued to hold a relatively firm position in the G10 performance rankings.

Rabobank says EUR/GBP gains earlier in the conflict were mainly driven by the removal of expectations for a March BoE rate cut.

Markets now see only limited easing ahead, with higher energy prices threatening to keep UK inflation elevated.

The bank estimates the surge in gas prices could add roughly 0.65 percentage points to UK inflation by mid year.

That would push headline CPI closer to 2.7% rather than the previously expected 2% level, making it harder for the Bank of England to ease policy further this year.

Even so, Rabobank believes sterling’s recent strength may prove temporary.

The UK economy remains exposed to a combination of high public debt, sticky inflation and a current account deficit. A prolonged energy price shock could also weaken growth and put pressure on public finances.

GBP/EUR year-ahead forecast: Median, range and upside/downside risks based on projections from 20+ investment banks and FX analysts.View forecasts

Political risks are another factor.

Local elections in England and parliamentary votes in Scotland and Wales are due in May.

Rabobank warns that a poor result for Labour could trigger a leadership challenge to Prime Minister Starmer, particularly if energy prices remain high and public frustration rises.

While short covering has supported the pound recently, Rabobank expects this effect to fade in the coming months.

As political and fiscal risks return to focus, the bank sees scope for the EUR to GBP exchange rate to grind gradually higher, with the pair potentially moving toward the 0.89 area by year end.