Pound to Euro: Seismic German Shift Drives Further EUR Gains vs GBP Sterling

March 6, 2025 - Written by David Woodsmith

STORY LINK Pound to Euro: Seismic German Shift Drives Further EUR Gains vs GBP Sterling

The Euro (EUR) has continued to make strong gains against the Pound Sterling (GBP) and US Dollar (USD) in global markets with the Euro-Dollar at 4-month highs at 1.0820 before a limited correction.

The Pound to Euro exchange rate (GBP/EUR) retreated further to 5-week lows near 1.1930 before stabilising.

Danske Bank commented, “EUR/GBP moved higher on the broad-based EUR optimism and combined with the high-volatility environment, it was a poor cocktail for GBP.”

Germany’s announcement that it will loosen fiscal rules and deploy EUR 900bn in additional spending over the medium term has continued to have a major impact.

German bonds posted sharp losses with the largest 1-day jump in bond yields since 1997.

Yields remain a key driver for currency rates and the Euro posted strong gains.

According to HSBC, “The mood music around the EUR has changed and is likely to support the EUR for now.

It did add; “Of course, challenges still remain, including the risk of a trade war with the US, and continued uncertainty over Ukraine.”

Attention will now focus on the latest ECB policy decision.

There are strong expectations that the central bank will cut interest rates by a further 25 basis points at Thursday’s meeting with the deposit rate lowered to 2.50%.

Given that a rate cut has been priced in, guidance from the bank is likely to be crucial.

MUFG commented, “With fiscal policy expected to play a bigger role going forward in supporting the euro-zone economy, it will reduce pressure on the ECB to lower rates below neutral territory, which President Lagarde has stated recently is estimated at around 1.75% to 2.25%.”

Lagarde will have to make comments on fiscal policy and inflation and is likely to face important questions surrounding trade tariffs.

She is likely to reiterate that there is a high degree of uncertainty, increasing the potential for caution.

MUFG added, “A stronger signal over a potential skip in April could reinforce the euro’s upward momentum today alongside any tentative indication from the ECB that room for rate cuts will be curtailed by updated fiscal plans.”

According to ING, “President Christine Lagarde can still give an extra boost to the euro should she signal a more cautious tone on further cuts.”

The UK 10-year yield has also increased to 7-week highs just above 4.70%.

Higher UK yields would offer some Pound protection, and the Bank of England will be cautious over cutting rates, but there will also be implications for the economy.

Markets are already fretting over UK fiscal policy with the Treasury planning cutbacks to spending plans in the March 26th budget.

Higher bond yields would create further pressure on fiscal policy through higher debt interest rate payments.

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TAGS: Pound Euro Forecasts