Pound Sterling to Euro Forecast: Scope to Strengthen to 1.19 by 2026

Modified: Thursday, 10 July 2025 07:00 BST - Written by Ben Hughes

STORY LINK Pound Sterling to Euro Forecast: Scope to Strengthen to 1.19 by 2026

Pound Shows Some Trade Backbone, but Lose-Lose Scenario on UK Budget Stresses?

The Pound to Euro (GBP/EUR) exchange rate found support around 1.1570 on Tuesday and rallied to just above 1.16.

The immediate focus will be on US-EU trade talks while the UK budget outlook will be an important underlying focus.

UBS still sees scope for GBP/EUR to strengthen to 1.19 at the end of 2025.

MUFG, however, expects medium-term losses to 1.13.

As far as trade is concerned, the US and EU have not signed a deal at this stage while the US Administration has not delivered a tariff letter.

There are reports that there will be a limited framework deal within the next two days.

The EU is likely to be given the 10% baseline tariff with higher tariffs on certain sectors. The argument over duties on EU food exports to the US is likely to be a key are of contention.

If the UK appears to have a better deal than the EU, the Pound could gain some net support.

According to ING; “We could see the EUR face some pressure on the crosses on the announcement.”

US and global developments will also be important in determining the extent of Euro demand in FX markets.

UBS commented; “The euro has already rallied significantly, so some consolidation in the coming months would not be surprising. Still, as the euro remains the default choice for global investors seeking to diversify out of the dollar—and with the European Central Bank (ECB) on hold—much depends on how investors view the US economy and the dollar.”

According to MUFG; “We suspect the performance of the pound could be turning and believe the outlook has worsened with increased risks of a period of underperformance ahead.”

The bank considered the implications of Tuesday’s OBR report and its warning that the UK had a budget deficit of 5.4% of GDP at the end of 2024 compared with an industrial-country average around 1.5%.

The bank notes important risks that budget fears will trigger a loss of confidence in the bond market.

The government has limited room for manoeuvre on taxes given the political pledge not to raise income taxes or VAT.

According to MUFG; “Without a credible big step measure (a wealth tax and/or a freeze on income tax thresholds are rumoured) a credibility gap will persist and risk further dangerous market disruptions. Sharp Gilt sell-offs, like recently, will be pound negative and potentially very disruptive.”

There will, however, also be implications of measures to narrow the budget deficit with a potential hit to growth and scope for a faster pace of Bank of England rate cuts.

MUFG added; “Action to address the fiscal hole will ultimately prove pound negative also but will be less disruptive and more palatable. In that scenario big tax increases into an already slowing economy will encourage a faster pace of rates cuts from the BoE. Either way, the risks for the pound are shifting and the outlook is worsening.”

RBC Capital Markets also expects Pound losses against the Euro; “We remain less optimistic on the pound than the euro or yen, conscious of the fact that the UK has weaker economic prospects and a more fragile fiscal situation.”

It added; “Also, while it is fairly valued versus the dollar, the pound is actually expensive when compared to the currency of the UK’s largest trading partner, the eurozone.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts