– Written by
David Woodsmith
STORY LINK British Pound to Euro Forecast: GBP Near Lows as ECB Raises Rates
The Pound to Euro (GBP/EUR) exchange rate remained under pressure on Thursday as investors digested another surge in UK bond yields and the European Central Bank’s latest interest-rate increase.
GBP/EUR continued to trade close to recent lows around the 1.1630-1.1650 area, with Sterling struggling to make sustained headway against a firm Euro.
ING expects gradual GBP/EUR losses and has a six-month forecast of 1.1240.
Risk conditions remained fragile as bond yields moved higher again and energy prices continued to rise.
Brent crude climbed above $105 per barrel, while European natural gas prices remained close to three-year highs, intensifying concerns over the inflation outlook and the threat of weaker growth.
The Pound tends to be vulnerable when global risk appetite deteriorates, while the UK’s fiscal position leaves Sterling particularly sensitive to rising long-term borrowing costs.
ECB Raises Rates to 2.50%
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The European Central Bank raised its deposit rate by 25 basis points to 2.50% on Thursday, in line with market expectations.
The move was aimed at containing renewed inflation pressures caused primarily by the surge in energy prices.
The ECB also raised its 2026 inflation forecast to 3.0% and expects inflation to remain above target for an extended period.
President Christine Lagarde highlighted the resilience of the Euro-Zone economy, but stressed that the outlook remained highly uncertain and that inflation risks were tilted to the upside.
ING had commented ahead of the decision; “The ECB must decide which risk is the lesser evil: overtightening (and potentially upsetting European bonds) or underestimating inflation.”
The bank had expected the ECB to strike a relatively cautious tone after delivering the hike.
The initial market response was limited, with the Euro unable to secure a major advance after the widely anticipated decision.
UK Gilt Yields Hit Fresh 19-Year Highs
The UK bond market remains a major source of concern for Sterling.
The 10-year gilt yield climbed to 5.348% on Thursday, its highest level since July 2007, while 20- and 30-year yields reached their highest levels since 1998.
Higher borrowing costs will place additional pressure on Chancellor John Healey ahead of the October 28 Budget and threaten to erode the government’s fiscal headroom.
Bank of England Governor Andrew Bailey had already pushed back against the assumption that further rate increases were inevitable.
According to Bailey; “When you look at the market curve, and when you break the market curve down as far as we can do, they’ve got essentially a risk premium in there”.
He added; “What I want to dispel is the idea that we’ve really got a secret plan, we know where we’re going to go to and it’s unconditional.”
Bailey’s comments highlighted the high degree of uncertainty surrounding monetary policy, with markets pricing additional tightening partly because of the risk that energy prices rise further.
The recent surge in oil has, however, strengthened speculation that the BoE could ultimately be forced to act.
Markets now price a November rate increase as close to a 90% probability, even though the Bank is still expected to leave rates unchanged at next week’s meeting.
Barclays commented on the September decision; “We expect a 6-3 vote (in favour of holding interest rates) as our baseline, with Greene, Mann and Pill dissenting. However, we see the risks as skewed towards more dissenters, with a small possibility they are joined by either Lombardelli or Ramsden.”
For GBP/EUR, the 1.1620-1.1650 area remains the immediate support zone.
A decisive break lower would increase the risk of a move towards 1.1600 and then ING’s much lower medium-term target.
A recovery above 1.1700 would ease the immediate pressure, but Sterling is likely to remain vulnerable while gilt yields stay close to multi-decade highs and energy prices continue to rise.
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TAGS: Pound Euro Forecasts
