Pound to Euro Forecast: ECB Cut Reinforces GBP's Yield Advantage Over EUR

June 5, 2025 - Written by Frank Davies

STORY LINK Pound to Euro Forecast: ECB Cut Reinforces GBP's Yield Advantage Over EUR

The latest ECB interest rate cut reinforced the Pound Sterling’s yield advantage over the Euro.

The Pound to Euro exchange rate (GBP/EUR), however, was unable to make any headway and retreated to near 1.1850 from 1.1880.

Rabobank expects further resistance near 1.19 with gradual medium-term losses.

There has been further evidence that the Euro-Zone current account surplus and creditor status is helping to underpin the Euro amid sustained uncertainty surrounding US trade policy.

In contrast, the UK continues to run a current account deficit which will maintain underlying Pound vulnerability.

Chinese President Xi held a call with US President Trump, but markets continued to fret over the tariff outlook.

Even with wider uncertainty, there is some optimism that the UK economy can gain some relative support from the US-UK trade deal.


IG Group chief market analyst Chris Beauchamp commented; "The trade deal does matter. "You might argue it's not a proper trade deal and that it doesn't solve all the problems, but at least it's a sign that there's a more compelling reason to hold the pound rather than be worrying about the euro."

The ECB cut interest rates by 25 basis points at the latest council meeting with the deposit rate lowered to 2.00%, the lowest reading since December 2022.

The central bank is more confident that inflation will stay close to the 2% target which justified the further move lower.

ECB President Lagarde stated that the inflation outlook was even more uncertain than usual while noting that increased defence spending and investment spending would help underpin the growth outlook.

Investment banks have reservations over the outlook.

According to ING; “Rapidly fading inflationary pressures have given the ECB ample room to bring interest rates into neutral territory. With the risk of inflation undershooting currently increasing, today’s rate cut will not be the last.”

JP Morgan Global Market Analyst Natasha May commented; "Huge uncertainty about the future of global trade might make the ECB’s ever-more data dependent approach look prudent. But in our view, this strategy pays too little attention to the downside risks to inflation."


She added; “With inflationary pressures receding fast and growth headwinds picking up, the ECB is underestimating the risk of undershooting its target. While some Governing Council members are advocating for a July pause, the case for another rate cut is crystal-clear."

The UK construction PMI index edged higher to a 4-month high of 47.9 for May from 46.6 the previous month and above consensus forecasts of 47.4.

Tim Moore, Economics Director at S&P Global Market Intelligence, commented; "The construction sector continued to adjust to weaker order books in May, which led to sustained reductions in output, staff hiring and purchasing. However, the worst phase of spending cutbacks may have passed as total new work fell at a much slower pace than the near five-year record in February.”

There are also still reservations over the UK fiscal outlook, especially if the global economy struggles.

According to Rabobank there are important underlying stresses; “The Spending Review will therefore likely be uncomfortable for both the government and investors alike. Also, while the EUR may be due a bout of profit-taking after this year’s move higher, Germany’s relatively better debt position and expectations for improved growth in 2026 should provide longer term support for the EUR.”

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TAGS: Pound Euro Forecasts