Spring Statement, Iran War Key Risks

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

The Pound to Euro (GBP/EUR) exchange rate ended last week on the back foot, with the cross last seen at 1.1409, down 0.19% on the day.

Friday’s price action left the British Pound nursing a modest weekly loss into the weekend, as markets digested the threat of an attack by the US on Iran over the weekend.

In the UK, the political backdrop continues to sit uncomfortably alongside an otherwise calm risk environment, with UK equities ending the week strongly while sterling struggled to capitalise.

Commentary around the late-week by-election result was a notable driver of short-term sentiment.

“There are some signs of modest weakness in GBP following confirmation of the Greens overturning a 13.4k Labour majority,” Lloyds noted.

ING struck a similar tone on the currency’s sensitivity to politics, saying: “Anything that is seen weakening the position of Prime Minister Keir Starmer has hit the pound as of late.”

A second factor for GBP/EUR has been how quickly markets can shift their focus from politics to policy.

On that front, the UK’s confidence data highlighted the fragility of demand, and by extension the risks around the near-term growth outlook.

The broader picture is that GBP/EUR remains heavy relative to recent months, with the pair down about 1.15% over the past month, and around 4.18% lower over the past 12 months.

On the euro side, the week’s data flow offered both dovish and hawkish signals for the European Central Bank.

Germany’s February inflation eased to 1.9% year-on-year, below expectations, while core inflation remained at 2.5%, reinforcing the view that headline disinflation is progressing faster than the stickier underlying components.

France, however, saw preliminary harmonised inflation pick up to 1.1% year-on-year in February, above expectations, underscoring why the ECB remains reluctant to pre-commit to a near-term easing path.

Spain’s flash CPI held at 2.3% year-on-year, with core inflation edging higher, a combination that is likely to keep the ECB cautious about declaring victory on inflation.

In practice, that mix matters for GBP/EUR because the cross increasingly trades as a relative-rates story at the margin.

If the market continues to lean toward a more active BoE easing cycle than the ECB, it can leave the pound vulnerable on rallies, even when the euro’s own data is not uniformly strong.

The backdrop is also complicated by “soft” eurozone survey signals, where sentiment measures have been wobblier, raising questions about how much growth can tolerate a prolonged period of restrictive policy if inflation continues to settle nearer target.

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

Macro focus now turns to how incoming inflation, jobs and activity data shape the two central banks’ reaction functions as March begins.

For sterling, the key issue is whether weaker household confidence and a softer labour market translate into a clearer easing bias from the Bank of England, or whether sticky services inflation dynamics force policymakers to move cautiously.

Recent reporting from the UK has highlighted that falling inflation is improving the scope for cuts, but the policy debate remains finely balanced amid concerns about wages and persistence.

For the euro, the ECB’s challenge looks more nuanced.

Headline inflation has moved closer to target in parts of the bloc, but core measures remain elevated enough to make officials wary of easing too quickly, particularly if energy or food disinflation proves less reliable as the year progresses.

The near-term outlook for GBP/EUR therefore looks likely to remain driven by a combination of the US-Israel war against Iran, UK political headlines, the market’s pricing of BoE cuts, and the euro area’s inflation pulse.

From a levels perspective, traders will be watching whether the pair can stabilise around the 1.14 handle after the late-February setback, or whether renewed selling pressure re-emerges on any rebound attempts.

Attention also turns to the week ahead for top-tier UK and eurozone releases, where any surprise in inflation or activity readings could quickly reprice rate expectations.