The Pound to Euro (GBP/EUR) exchange rate has consolidated around 1.1560 after hitting resistance close to 1.16 with moves relatively contained despite very high overall volatility associated with the Iran war.
Danske Bank notes a mixed outlook for the Pound, especially with major uncertainty surrounding Middle East developments but, overall, expects that weak UK fundamentals will result in gradual net losses with a 12-month GBP/EUR forecast of 1.1360.
Developments in energy prices will remain a key element in the short term. According to Danske, the overall dynamics of energy dependency and import demand suggests that the forces are likely to be slightly positive for the Pound.
Monetary policy will also be a key element and there has been a major shift in expectations with traders expecting the Bank of England (BoE) and ECB to hike rates this year.
The BoE held rates with a relatively hawkish statement at the latest meeting. Danske has adjusted its forecasts and is now forecasting a cut in July 2026 followed by a further move in February next year.
Danske still expects no change in ECB rates and considers that rate trends will act as a headwind for the Pound.
