Pound to Euro Forecast: "Overvalued" Sterling, GBP/EUR Likely to Retreat

May 31, 2025 - Written by Frank Davies

STORY LINK Pound to Euro Forecast: "Overvalued" Sterling, GBP/EUR Likely to Retreat

The Pound to Euro exchange rate (GBP/EUR)dipped to lows around 1.1865 on Thursday before a recovery to 1.1885 on Friday.

The failure to hold above the 1.1900 level triggered a quick liquidation of long Pound positions, but the Pound still has solid yield support.

Monetary policy expectations and global risk conditions will remain key elements with traders also monitoring US trade talks.

According to Nomura GBP/EUR is likely to retreat; “Fiscal concerns are more likely to become a hindrance for the currency, external balances are broadly negative, and GBP is already showing signs of overvaluation.”

Credit Agricole, however, expects GBP/EUR gains to 1.2050 at the end of 2025.

AS far as central banks are concerned, the key message from Bank of England Governor Bailey was the increase in uncertainty which will make it extremely difficult to set monetary policy.

Bailey pointed to supply-side tensions in the economy which are being amplified by uncertainty over US trade policy.


According to Bailey; “Our jobs are much harder if we face more inflexible and uncertain supply side conditions in our economies, as we appear to do today.”

Bailey noted that this justified the gradual and careful approach to policy. He also stated that the bank spends a lot of time looking at risks from market fragilities including bonds.

MPC member Taylor maintained a dovish policy stance.

According to Taylor; “I’m seeing more risk piling up on the downside scenario because of global developments.

He added that a trade war is going to be negative for growth and he thinks a lower monetary policy path is needed, especially as higher inflation is not being driven by demand and supply pressures.

Kenneth Broux, head of corporate research FX and rates at Societe Generale noted; "GBP has done well in recent weeks on the back of U.S. and EU trade/reset deals, above-forecast consumer spending and less crowded positioning."

According to Credit Agricole; “the legal drama over the Trump tariffs could also help ease global stagflation risks over time and thus support market risk sentiment in the long term. In turn, this could give FX carry trades a boost and fuel demand for higher-yielding currencies like the GBP.”


The ECB will hold its latest policy meeting next week with markets confident that there will be a further 25 basis-point cut in the deposit rate to 2.00%.

RBC Capital Markets expects a tough meeting; “We think there are strong divisions on the Governing Council and would be very surprised if the decision was unanimous.

There is also much less conviction over the outlook.

According to ING; “Unless trade tensions return with a vengeance, our suspicion is that the ECB would like to stick to a wait-and-see approach over the summer.”

German retail sales data was weaker than expected with a 1.1% decline for April.

Wells Fargo does not see sustained Euro support; “the currency will, in our view, still be faced with the reality of uninspiring sentiment and confidence surveys, an underwhelming growth performance.”

Credit Agricole is also cautious over the Euro outlook, The Eurozone is not out of the woods either as the latest estimates merely point to stagnant activity and a more pronounced cooling in inflation. In this context, the ECB is likely to downgrade its growth and inflation projections, alongside a seventh consecutive rate cut.

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TAGS: Pound Euro Forecasts