Pound to Euro Forecast: Crédit Agricole Warns a BoE Hike May Disappoint
Crédit Agricole sees Pound Sterling losing ground against the Euro as stretched UK rate expectations leave little room for a cautious Bank of England.
Pound Sterling briefly bought more than €1.20 on Friday, with the Pound-to-Euro exchange rate reaching 1.2016 before finishing at 1.1997.
Pound to Euro (GBP/EUR): 1.196366 (-0.28%)
Euro to Dollar (EUR/USD): 1.121563 (+0.50%)
Crédit Agricole’s retained forecast points in the opposite direction over the next few months.
The bank projects EUR/GBP at 0.86 in December 2026 and March 2027, equivalent to GBP/EUR of approximately 1.1628.
Exchange Rates UK calculates that this would leave Pound Sterling roughly 3% below Friday’s closing level against the Euro.
Crédit Agricole expects a November hike but doubts the MPC will validate the scale of further increases investors have anticipated, leaving an expensive currency exposed to profit-taking.
Valuation challenges the recent resilience
Valentin Marinov, Crédit Agricole’s head of G10 FX strategy, sees a mismatch between the cross and its near-term economic drivers:
“We also note that short-term fair value model continues to signal that EUR/GBP is looking very undervalued at current levels.”
An undervalued EUR/GBP implies that Pound Sterling looks expensive against the Euro in that model, though valuation alone does not establish when the exchange rate will turn.
Recent trading shows why that timing remains uncertain.
JPMorgan’s FX desk became more positive on Pound Sterling after the Budget:
“Price action is pretty marked in EURGBP as well testing lower on the initial ECB statement but completely ignoring the resulting EUR squeeze that came later.”
The desk still considered the move stretched and warned about month-end flows, but the observed resilience challenges an immediate reversal call.
The BoE’s next decision on 5 November provides the first major policy test.
Higher yields can become a burden
The case for another UK increase is not in dispute within Crédit Agricole’s analysis:
“The BoE should hike rates in November given sticky inflation and the resilient economy in the UK that have pushed the country’s economic surprise indicator to fresh multi-month highs recently.”
The latest official figures put September CPI inflation at 3.5%, with services inflation accelerating to 3.7%.
The disagreement concerns how long those pressures will justify tighter policy as households absorb higher energy and borrowing costs.
Marinov writes:
“Moreover, as highlighted by several MPC members, UK financial conditions have tightened considerably of late, and this could reduce the pressure on the BoE to embark on an aggressive tightening cycle.”
“We thus worry that the correlation between the GBP and gilt yields could turn negative once again if tighter financial conditions make the BoE more dovish in the coming months.”
A higher gilt yield can attract investors seeking income, but it also makes financing more expensive across the economy.
If that restraint weakens demand sufficiently, investors may reduce their expectations for future BoE increases even while borrowing costs remain elevated.
Marinov’s wider concern is that investment strength may fade and fiscal constraints will limit spending:
“All this, together with a lacklustre services sector outlook, could make the BoE conclude that the UK economic outlook may start weakening again in 2027 and beyond.”
Crédit Agricole concludes:
“The above considerations make us think that the outcome of next week’s BoE meeting could leave the GBP vulnerable to profit-taking on stretched market longs especially vs the EUR.”
Its dated projection gives a clearer measure of the potential retracement than the earlier warning from OCBC that UK rate pricing limits further gains.
The Euro’s own support remains contested
A cautious BoE message would matter more if investors remained confident that European rates could rise.
Crédit Agricole saw some encouragement in Thursday’s ECB meeting:
“The outcome of the October policy meeting validated our and market expectations of further tightening ahead and thus gave the EUR’s relative rate appeal a modest boost across the board. That said, Eurozone financial conditions tightened as well after the OAT-Bund yield spread widened somewhat.”
That spread measures France’s extra borrowing cost over Germany and remains a source of anxiety about European public finances.
Another deterioration in French bonds could sustain demand for Pound Sterling even if the BoE disappoints on future hikes.
Marinov also points to the ECB’s Transmission Protection Instrument, or TPI:
“Lagarde also highlighted that the ECB’s policy tools like TPI should help it respond to any further bond market turbulence, allowing it to preserve its ability to address any further build-up of price pressures.”
What This Means for GBP/EUR
Crédit Agricole’s forecast implies a move back towards €1.16 by end-2026, substantially below Friday’s brief €1.20-plus reading. Its valuation assessment supports that direction, while JPMorgan’s account of recent resilience explains why an immediate reversal is not assured.
Thursday’s guidance could bring that forecast closer if it leaves investors less confident about the UK tightening cycle, without a fresh European bond shock pulling the Euro down at the same time. The policy statement and updated outlook matter alongside the rate decision itself.
If the BoE instead endorses further increases and French borrowing pressures remain acute, Pound Sterling could retain the relative advantage Crédit Agricole expects to diminish. That combination would challenge the bank’s near-term forecast even after the cross has reached €1.20.
