Pound-to-Euro Forecast: Stagflation Fears Undermine Sterling

July 25, 2025 - Written by David Woodsmith

STORY LINK Pound-to-Euro Forecast: Stagflation Fears Undermine Sterling

The Pound to Euro (GBP/EUR) exchange rate hit highs at 1.1565 on Wednesday before a retreat to just below 1.1520 after the latest UK data and close to 3-month lows of 1.1500.

The business confidence release will reinforce UK stagflation fears and there is likely to be increased speculation that the Bank of England will cut interest rates despite stubborn inflation pressure which would tend to undermine the Pound.

Trade developments and the ECB policy meeting will be key for the Euro during the day.

The single currency is likely to make net gains if the US announces that a trade deal has been reached with the EU and this could push GBP/EUR below 1.15.

In contrast, dovish ECB rhetoric could hurt the Euro.

ING commented; “If the ECB is feeling confident that a trade deal is coming, the risks of a dovish surprise are indeed lower. However, the currency discussion remains a wildcard that poses downside risks for the euro.”

The UK PMI manufacturing index edged higher to a 6-month high of 48.2 for July from 47.7 previously and slightly above consensus forecasts.


The services-sector index retreated to a 2-month low of 51.2 from 52.8 the previous month and compared with expectations of no change.

Employment declined at the fastest rate for 6 months.

There was a sharp increase in cost pressures for the month with a further impact from higher National Insurance Contributions while prices charged also increased at a faster rate during the month.

Confidence edged higher on the month, but caution and uncertainty prevailed.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence: “The flash UK PMI survey for July shows the economy struggling to expand as we move into the second half of the year

Subdued growth and on-going cost pressures is not a good combination for the Bank of England.

According to S&P’s Williamson; "The weak growth trajectory and sustained culling of jobs will add to pressure on the Bank of England to cut rates again at its next policy meeting in August.”


He added; “It seems likely that the disappointing growth and labour market trends will increasingly dominate the inflation forecasting narrative, encouraging policymakers to ‘look through’ the recent rise in price pressures and instead focus on helping to revive growth.”

There are strong expectations that the ECB will leave interest rates at 2.0% with guidance likely to be crucial.

According to MUFG; “The ECB is unlikely to push back strongly against euro strength at the current juncture.”

Danske Bank commented; “Lagarde will likely abstain from commenting much on the rumours today, but it is obvious that a successful outcome of the trade negotiations with the US could be decisive for the outcome of the September meeting.”

The Euro-Zone manufacturing PMI business confidence index edged higher to a 36-month high of 49.8 for July from 49.5 previously even though output remained weak.

The services-sector index also improved to a 6-month high of 51.2 from 50.5 and above market expectations of 50.6 with the composite output index at an 11-month high.

There was mixed evidence of pricing with output charges overall increasing modestly at the same rate as in June.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “The eurozone economy appears to be gradually regaining momentum. The recession in the manufacturing sector is coming to an end, and growth in the services sector accelerated slightly in July.”

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TAGS: Pound Euro Forecasts