Pound-to-Euro Forecast: BoE Debate Intensifies After Surprise Inflation Drop

Modified: Thursday, 21 May 2026 16:56 BST - Written by David Woodsmith

STORY LINK Pound-to-Euro Forecast: BoE Debate Intensifies After Surprise Inflation Drop

The Pound to Euro exchange rate (GBP/EUR) remained close to one-week highs near 1.1550 despite softer-than-expected UK inflation data, as markets continued to price in the possibility of further Bank of England tightening later this year.

While lower inflation eased some immediate pressure on policymakers, Sterling found support from resilient rate expectations and a reduction in near-term political uncertainty surrounding Prime Minister Keir Starmer.

GBP/EUR Forecasts: Testing 1-Week High

The Pound to Euro (GBP/EUR) exchange rate has remained resilient despite lower than expected inflation data and is trading near 1.1550, close to 1-week highs.

Markets were still pricing in Bank of England rate hikes which underpinned the Pound, although the debate is likely to intensify.

Traders are also adjusting the timescale of a potential formal challenge to Prime Minister Starmer with the Makerfield by-election not taking place until June 18th.

MUFG is still negative on the overall Pound outlook; “Based on the preferences of Labour Party members, a soft-left candidate such as Andy Burnham, Angela Rayner, or Ed Miliband is favoured to become the next leader, implying a potential shift to the left in policymaking.”

It added; “Negative political developments are adding to gilt selling pressure linked to the energy price shock.”

ING, however, is now slightly less bearish on the Pound against the Euro.

The headline UK inflation rate dipped to 2.8% from 3.3% previously and below consensus forecasts of 3.0%. The core rate also declined to 2.5% from 3.1% and slightly below expectations of 2.6%.

The goods inflation rate increased to 2.4% from 2.1% while the services rate fell sharply to 3.2% from 4.5%. The main factor was a sharp decline in energy prices for April.

This effect will, however, reverse in July when the price cap will increase sharply.

There were also important warnings of pipeline pressures with input wholesale prices increasing 7.7% over the year while output prices increased 4.0% from 3.0% previously.

ING commented; “Taken all together, we’re now expecting inflation to bounce around between 3.5-4% in the second half of the year, peaking briefly just below 4%.”

As far as Bank of England policy is concerned, Aberdeen deputy chief economist Luke Bartholomew commented; “Inflation coming in softer than expected today will further take the pressure off the Bank of England to hike rates over the next few meetings. But we are most certainly not out of the woods in terms of the impact of the Iran conflict on inflation.”

According to ING, however; “Like yesterday's jobs numbers, the data questions the need for aggressive rate hikes.”
ING narrowly backs a rate hike at the June meeting, but added; “That is now in serious doubt, though clearly a lot can still happen in the Middle East between now and then. And we suspect if there’s no big improvement in energy flows by mid-June, officials might still be tempted to raise rates. We’re open-minded; it’s just as conceivable that the Bank could play for more time.”

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TAGS: Pound Euro Forecasts