– Written by
Frank Davies
STORY LINK British Pound to Euro Forecast: Can GBP Reclaim 1.17?
The Pound to Euro (GBP/EUR) exchange rate recovered some of Wednesday’s losses on Thursday, although the pair remained comfortably below the 1.1700 level.
GBP/EUR traded around 1.1669 during the afternoon session, up around 0.2% on the day after falling to the 1.1650 area on Wednesday.
The latest UK inflation figures had little immediate impact on Sterling, with markets continuing to assess the balance between persistent energy-driven price pressures and softer domestic wage and employment trends.
ING expects relatively high UK yields to continue providing some near-term support for the Pound.
The bank commented; “Our call is that the BoE does not need to hike again, but that the realisation of that may not weigh on sterling until later in the year.”
It added; “In a low volatility environment, sterling is probably still enjoying some carry demand given it is one of the highest, volatility-adjusted currencies in G10.”
Pound Sterling: UK Inflation Rises to 2.9%
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Headline UK consumer-price inflation increased to 2.9% in July from 2.6% previously, matching consensus forecasts.
The increase was driven largely by higher household energy costs following July’s 13% increase in the Ofgem price cap.
Core inflation held at 2.6%, while services inflation eased to 3.4% from 3.6%.
Goods inflation increased to 2.2% from 1.7%.
Food and non-alcoholic drinks inflation, however, slowed to 1.3%, providing some evidence that broader domestic price pressures remain contained.
Capital Economics deputy chief UK economist Ruth Gregory commented; “Domestically generated inflation remains contained.”
She added that, provided energy prices do not rise much further, inflation should continue moving back towards the Bank of England’s 2% target during 2027.
ING expects the headline inflation rate to rise further over the coming months as higher energy prices continue to feed through to households.
The bank commented; “We currently expect headline inflation to peak around 3.2% into next winter.”
However, ING considers that inflation would need to rise substantially further before the Bank of England felt compelled to tighten monetary policy again.
It added; “We continue to see the Bank of England keeping rates on hold this year, before resuming rate cuts next spring.”
Other analysts are more cautious.
JP Morgan commented; “While one data reading doesn’t always tell the whole story, this rebound in UK inflation is a warning shot for what could come next.”
Money markets continue to price a meaningful chance of another Bank of England rate increase before the end of 2026.
MUFG considers this week’s labour-market and inflation figures unlikely to materially change the Bank of England’s immediate policy stance.
The bank commented; “Combining the jobs and inflation data, this data is unlikely to alter the dial much in terms of BoE thinking.”
It added that external developments, particularly the Middle East conflict and its impact on energy prices, remain more important for the policy outlook than current domestic conditions.
Oil prices moved sharply higher again on Thursday, with Brent crude climbing above $94 per barrel and reaching a three-week high amid continuing disruption to Middle East supplies.
MUFG warned that if there is no progress towards reopening the Strait of Hormuz and energy prices continue to rise, the Bank of England could ultimately be forced to tighten policy before year-end.
Conversely, a sustained decline in energy prices would make it easier for policymakers to remain on hold.
Near-Term GBP/EUR Forecast: 1.1650 Remains Key Support
GBP/EUR has recovered from Wednesday’s test of the 1.1650 area, but the short-term outlook remains finely balanced.
The 1.1650 region remains the immediate support level.
A sustained break below this area would expose the August low around 1.1648 before the 1.1600 level comes into focus.
On the upside, Sterling needs to recover above 1.1700 to ease the immediate downward pressure.
A move beyond 1.1720 would improve the technical picture further, although the Pound may struggle to secure a sustained advance while uncertainty persists over both UK monetary policy and the autumn fiscal outlook.
For now, high UK yields are providing some support, but energy prices and the response of global bond markets are likely to remain important drivers for GBP/EUR.
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TAGS: Pound Euro Forecasts
