British Pound to Euro Forecast: GBP Re-tests 1.16 as ECB Rate Expectations Fade

– Written by


Frank Davies

STORY LINK British Pound to Euro Forecast: GBP Re-tests 1.16 as ECB Rate Expectations Fade

The Pound to Euro exchange rate (GBP/EUR) strengthened back towards the 1.1600 level as investors scaled back expectations for aggressive European Central Bank rate hikes and confidence in the Euro weakened. Sterling also drew support from steady risk appetite and calmer UK bond-market conditions despite lingering political uncertainty surrounding Prime Minister Keir Starmer

GBP/EUR Forecasts: Re-tests 1.16

The Pound to Euro (GBP/EUR) exchange rate again tested the 1.16 level on Tuesday before consolidating just above 1.1580. The Euro was hampered by fresh doubts whether the ECB would sanction multiple rate hikes.

Overall risk appetite held firm which helped underpin the Pound while there were no renewed stresses in the bond market with the 10-year yield around 4.87% from just above 4.90% at the end of last week.

According to SocGen, any break above 1.1615 could be the trigger for further gains to above 1.17.

Underlying political tensions continued, but immediate chatter was curbed by the House of Commons recess and a focus on extreme temperatures.

The Makerfield by-election will be held on June 18th with tensions set to intensify next week. Polling evidence tends to be sketchy in by-elections, but evidence of a strong performance by Greater Manchester mayor Burnham would intensify speculation.

If Burnham wins, there will be expectations of a challenge to Prime Minister Starmer. The key element will be whether Burnham wins and whether a successful challenge would trigger a change in fiscal policy.

According to UBS; “The prospect of a leadership challenge from (Manchester mayor) Andy Burnham has added to the headlines, but we expect only limited fiscal policy change regardless of the outcome.”

The UK CBI retail sales index improved to -46 for May from -68 previously and slightly above consensus forecasts of -52. Retailers expect a smaller decline in sales for June. Prices increased at the slowest rate since February 2025.

Charlotte Dendy, Economic Surveys & Data Manager, CBI, commented; “The marked slowdown in retail price growth reported in May underscores the weakness in demand that retailers continue to face.”

There are no major UK data releases this week, but anecdotal evidence on spending and Bank of England (BoE) thinking will be watched closely.

Evidence of weak corporate pricing power would tend to curb expectations of BoE rate hikes.

There has, however, also been a shift in ECB pricing with markets now expecting two rate hikes this year compared with at least three earlier this month.

ING commented; “last week’s batch of softer European PMI data clearly warns of a contraction in European activity in the second quarter. The ECB is undoubtedly breathing a sigh of relief over market pricing of rate hikes, and we think it will hike only once this year, in June.”

A shift in ECB pricing would tend to undermine Euro support.

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TAGS: Pound Euro Forecasts