Pound-to-Euro Forecast: GBP Sterling Risk on "More Dovish" BoE

May 6, 2025 - Written by Frank Davies

STORY LINK Pound-to-Euro Forecast: GBP Sterling Risk on "More Dovish" BoE

UPDATE: The Pound to Euro (GBP/EUR) exchange rate pared Tuesday's gains after Friedrich Merz became Germany's new chancellor, winning a second vote in the country's parliament.

"EURGBP sold off 0.7% before Merz sworn in, as his lack of majority casted doubts over the ability of the government to follow through with the stimulus program, "say Barclays.

"However, the move was almost completely retraced after Merz secured the majority."

GBP/EUR again failed to sustain a move above 1.1765, but found support on dips and settled just above 1.1750. A plethora of fundamental factors continue to pummel currency markets, including this week’s Bank of England (BoE) interest rate decision.

MUFG noted mixed forces on the Pound; “A more dovish policy update from the BoE poses downside risks for the GBP in the week ahead, and could deliver a setback after the recent rebound.”

It added; “On the other hand, the GBP will derive support if financial market volatility continues to ease encouraged by building investor optimism over trade deals/agreements to reverse President Trump’s tariff plans especially involving China and the UK.”

ING does see scope for GBP/EUR to make gains once long Euro positions are cut; “We think EUR/GBP may stabilise around 0.850 for now as a well-telegraphed BoE cut should not trigger major moves. Ultimately, the euro’s greater exposure to potential positioning adjustments means the risks remain skewed to the downside for EUR/GBP.”


The current yield structure is continuing to underpin the Pound, but there is speculation that the BoE will be more aggressive in cutting interest rates.

Nomura expects such a dovish BoE shift and forecasts a GBP/EUR retreat to 1.15 at the end of June.

The UK PMI business confidence index was revised marginally higher to 49.0 for April from 48.9 in March, but still below the March figure of 52.5.

Overall business confidence dipped to the lowest level since October 2022.

Costs increased at the fastest rate since July 2023 while prices charged increased at the fastest rate for close to two years.

Tim Moore, Economics Director at S&P Global Market Intelligence, commented; "Business expectations for the year ahead fell sharply as service sector firms braced for an extended period of global economic turbulence and heightened recession risks.”

The PMI data illustrates major difficulties faced by the BoE with evidence of weaker demand at the same time as increased inflation pressures.


There are very strong expectations that the BoE will cut interest rates by 25 basis points to 4.25% this week.

There is also speculation that the Monetary Policy Committee (MPC) will change its guidance and suggest the possibility of a faster pace of rate cuts over the next few months.

MUFG commented; “One way for the BoE to signal that they are more open to the possibility of cutting rates again sooner perhaps at the following MPC meeting in June would be to drop guidance that “gradual” further withdrawal of monetary policy restraint is appropriate.”

Dovish guidance would tend to hurt the Pound.

The Euro-Zone PMI services sector was revised to 50.1 in the final April reading from the flash figure of 49.7, but still below the March figure of 51.0.

As far as prices are concerned, cost pressures dipped to a 5-month low with the slowest rate of output charges seen in 2025. The data will maintain pressure for further ECB interest rate cuts.

There was also a notable surprise in Germany as CDU leader Merz failed to gain a majority to be Chancellor in the Bundestag vote which will create further uncertainty.

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TAGS: Pound Euro Forecasts