Pound to Euro Exchange Rate Surges to 17-Month High After Inflation Surprise

Modified: Saturday, 4 July 2026 16:06 BST - Written by David Woodsmith

STORY LINK Pound to Euro Exchange Rate Surges to 17-Month High After Inflation Surprise

The Pound to Euro exchange rate (GBP/EUR) surged to a 17-month high near 1.1690 after softer-than-expected Eurozone inflation reinforced expectations that the European Central Bank may slow the pace of further tightening.

Cooling price pressures across the single-currency bloc have undermined the Euro, while continued short covering and fading UK political concerns have helped Sterling extend its rally.

GBP/EUR Forecasts: Surges to 17-Month High

The Pound to Euro (GBP/EUR) exchange rate continued to challenge a key resistance area on Wednesday and a breakout through this level helped trigger further gains to a 17-month high near 1.1690.

ING doubts that gains will extend beyond the 1.17 area with renewed losses later in the year while Bank of America sees scope for gains to 1.1765.

There has been further evidence of position adjustment given the shift in sentiment. ING commented; “asset managers in particular have been running some large sterling short positions. At the same time, it is expensive to be short sterling, where one-week rates are around 3.80%, and with volatility falling we are probably seeing some position liquidation.”

A key element will be whether this short covering continues with monetary policy inevitably a key factor for markets.

The latest Euro-Zone data recorded a decline in headline inflation to 2.8% from 3.2% previously and below consensus forecasts of 3.0% while the core rate retreated to 2.4% from 2.6% and below expectations of 2.5%.

ING commented; “Softer eurozone inflation figures raise questions about whether the ECB needs to follow up with a hike in September after all. Here, a 15bp hike is currently priced for that meeting.”

ING added; “However, our eurozone macro team warn that inflation could pick up over the coming months as many government energy subsidy measures expire at the end of June. So it is probably too early to say that a September hike is completely off the table.”

According to MUFG; “we believe it is too soon to drop our call for a September hike although acknowledge that there is higher risk now that rates will be left on hold through the rest of this year.”

Bank of England (BoE) policy will also be monitored closely. Although BoE Governor Bailey remains cautious over the potential for rate hikes, he also considers that a short-term cut is out of reach.

According to Bailey; "There was an expectation that we would cut rates this year. That's not unreasonable in the context of a softening economy. That was off the table in March, and it's off the table at the moment."

MUFG commented; “His comments are consistent with our view that the BoE are likely to leave rates on hold through the rest of this year leaving room for UK rates to continue adjusting lower.”

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TAGS: Pound Euro Forecasts