Pound to Euro Week Ahead Forecast: "Downside Risks for GBP"

July 7, 2025 - Written by Tim Boyer

STORY LINK Pound to Euro Week Ahead Forecast: "Downside Risks for GBP"

Foreign exchange analysts at HSBC forecast that the Pound to Euro exchange rate (GBP/EUR) will weaken to 1.1365 by the end of 2025.

CIBC expects GBP/EUR will hold steady and advance to 1.1765 at the end of 2026.

There was little immediate reaction to the series of the government U-turn on welfare reform. The Pound, however, then dipped sharply on Wednesday as a distressed Chancellor during Prime Minister Questions triggered speculation that she was set to be replaced.

GBP/EUR slumped to 10-week lows near 1.1530 but regained ground later in the week as Prime Minister Starmer insisted that her position was safe.

There will still be underlying concerns surrounding the underlying budget dynamics.

According to Commerzbank; “Although Starmer repeatedly emphasized afterwards that he fully backed his finance minister, the damage has been done. The market can no longer be sure that budgetary discipline will really be maintained in the UK.

It added; “It is irrelevant whether Reeves can continue, or whether and, if so, who Stamer will choose as her successor - the damage to the pound and long-term interest rates has been done."


MUFG also pointed to renewed instability fears; “we were somewhat optimistic that a return to stability after the turbulence of the Brexit years, which saw five prime ministers in six years, would ultimately create better growth conditions.”

It added; “That story has quickly unravelled with policy U-turns and now the speculation around the ousting of the chancellor, which triggered a sharp increase in gilt yields.”

MUFG expects GBP/EUR will retreat to 1.15 by the second quarter of 2026, but sees a downside threat; “Relative to last month we see increased risks that the MPC could go back-to-back with cuts in August and September if labour market data remains weak. That points to downside risks for GBP relative to our forecasts.”

Rabobank commented; “the moderate pace of growth in the UK has fed speculation that the Chancellor may have little option but to raise taxes again later this year in order to meet her fiscal rules.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown added; "There is speculation that given the difficulties the government has faced in finding savings from welfare budgets, tax rises are likely in the Autumn Budget.”

A tighter fiscal policy would potentially have a significant impact on monetary policy.

Streeter added; "Bets are rising that the Bank of England will cut interest rates more quickly. So, that’s kept a bit more downwards pressure on sterling."


Bank of England MPC member Taylor maintained a dovish stance and called for three interest rate cuts over the remainder of this year.

As far as the Euro-Zone is concerned, HSBC sees scope for a sustained increase in Euro demand; “Since the eurozone debt crisis, the Eurozone’s weak growth has often led investors to underweight the bloc in investment portfolios. But international investors are beginning to diversify out of the US with the EUR likely to benefit from capital inflows at least in the term.”

Rabobank notes the risk that Euro-Zone hopes could be disappointed; “Just as optimism surrounding UK economic prospects subsided this year, hopes for a renewal in Europe have expanded. This view, however, is not without risk. German growth is not expected to see any significant boost from fiscal spending until 2026 and beyond and efforts to de-regulate, boost consumption and lift productivity within the EU will be tough.”

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TAGS: Pound Euro Forecasts