Pound-to-Euro Week Ahead Forecast: GBP Retreat to 1.1365, says Bank

Modified: Monday, 4 August 2025 11:02 BST - Written by James Fuller

STORY LINK Pound-to-Euro Week Ahead Forecast: GBP Retreat to 1.1365, says Bank

Foreign exchange analysts at MUFG expect a gradual Pound to Euro exchange rate (GBP/EUR) retreat to 1.1365 by the second quarter of 2026 amid lacklustre UK fundamentals and gradual interest rate cuts.

There was high volatility in GBP/EUR during the week, primarily under global influences, although Pound sentiment also deteriorated late in the week.

The Euro briefly rallied following the EU/US trade deal, but was then subjected to significant selling amid concerns that the deal would damage the Euro-Zone economy.

GBP/EUR rallied strongly from 20-month lows near 1.1420 to above 1.16, but failed to hold the gains and retreated back to 1.1480 as the latest Institute of Directors survey indicated that UK business confidence had dipped to a record low.

The Euro also rallied on expectations of an aggressive fiscal stimulus while weaker equity markets undermined the Pound.

The immediate focus will be on the Bank of England with strong expectations of a rate cut this week. Consensus forecasts are for a 25 basis-point cut to 4.00%, but a split decision is likely.

MUFG expects a divided MPC will continue to implement quarterly interest rate cuts as it attempts to steer a path through divisions and divergent opinions on the committee.


The bank is also uneasy over the Pound fundamentals; “This mix of higher than anticipated inflation and weakening economic growth is an unfavourable mix for the pound.

It added; “The continued gradual easing by the MPC but weak growth and uncertainty over the UK’s fiscal position will likely see the pound underperform against many other G10 currencies.”

HSBC remains wary over the UK fiscal outlook, especially given recent government reversals on welfare.

According to the bank; “These U-turns further reduce headroom in the autumn, even before any OBR revisions or market moves are taken into account. At that point, Chancellor Rachel Reeves will have to risk the ire of either the public, by taking action – probably by raising tax again – or the bond markets, by not taking action, which effectively would mean missing the fiscal targets and increasing borrowing.”

HSBC added; “While our base case is for a limited rise in unemployment in 2025 and a stabilisation in 2026, the worry is that the decline could continue or even accelerate.”

Lloyds Bank commented; “We continue to see the Pound as overvalued and the only viable adjustment channel for an economy struggling to generate growth.”

The Euro-Zone headline inflation rate held at 2.0% with the core rate also unchanged at 2.3%, maintain expectations that the ECB can be patient in determining whether interest rates should be cut again.


ING commented; “The European Central Bank should savour the moment. Two months in a row of being exactly on target is something that doesn’t happen very often. But while it’s unlikely that the streak will continue much longer as inflation rarely holds steady, the short-term inflation environment does seem quite benign.”

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TAGS: Currency Predictions Pound Euro Forecasts