July 2, 2025 – Written by James Fuller
STORY LINK Pound-to-Euro Forecast CUT to 1.1360 at HSBC
Forecasts vary, but some high street banks suggest further downside for the Pound to euro exchange rate as UK political uncertainty and rate cut risks weigh on Sterling sentiment.
The Pound attempted to rally on Tuesday, but rebounds met selling interest and the Pound to Euro (GBP/EUR) exchange rate retreated to 10-week lows close to 1.1630.
ING commented; “EUR/GBP remains underpinned by a bullish bias, with the welfare reform reversal doing little to alter that outlook. Incoming UK data over the coming weeks will determine whether any push above 0.8600 (GBP/EUR below 1.1630) proves sustainable.”
The multiple U-turns on welfare reform have raised fresh concerns that further UK tax increases will be needed.
UK gilt yields were, however, broadly stable with the 10-year yield close to 4.50% which limited the scope for more substantial near-term Pound selling.
MUFG expects GBP/EUR to trade around 1.1630 at the end of 2025.
HSBC is more bearish on the Pound and forecasts losses to 1.1360 by the end of this year.
The government managed to win a House of Commons vote on welfare payments. The Administration, however, was heading for defeat and had to make further last-minute concessions to cut the number of rebels.
A key element is that the planned savings have been watered down dramatically.
Helen Miller, the new head of the Institute for Fiscal Studies thinktank commented; “There will be a reduction in the health element of Universal Credit, that will be some savings for the Government, but there is an increase in the sort of regular rate of Universal Credit. That is a giveaway.”
She added; “The Government has moved from a position of saving some money to saving nothing, at least by the end of this Parliament.”
Looking at the implications she noted that tax changes are; “increasingly likely at the budget”.
The position of Prime Minister Starmer and Chancellor Reeves have both been weakened further.
ING commented; “Aside from the potential implications for the stability of PM Starmer’s party leadership, the probability of autumn tax hikes has probably increased further.”
Monetary policy will also be a key underlying element for the Pound.
According to the latest Incomes Data Research survey, median UK pay awards increased to 3.4% in the three months to May, from 3.2% previously with some impact from the April minimum wage hike.
Private-sector pay deals increased to 3.5%, with close to 20% of employers giving raises above 6% from 12% in April.
The Bank of England is expecting that overall wage pressures will continue to subside, but the equation for interest rate cuts will change sharply if pressures continue.
MUFG expects further weakness in the labour market and added; “Relative to last month we see increased risks that the MPC could go back-to-back with cuts in August and September if labour market data remains weak. That points to downside risks for GBP relative to our forecasts.”
CIBC added; “We see the risks to BoE pricing as tilted towards more rather than less easing, as the MPC appears to be putting increased focus on the output gap.”
HSBC added; “If UK data stay soft, the BoE will have to deliver more cuts.”
The Euro will be vulnerable if currency strength triggers ECB warnings over renewed downward pressure on inflation. In comments on Monday Vice-President de Guindos stated that the bank would be comfortable with EUR/USD at 1.20, but gains above this level could be more complicated.
CIBC commented; “While some ECB members may soon become nervous regarding the pace of EUR appreciation, we would still view the currency as being on the cheap side of relative fair value.”
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TAGS: Pound Euro Forecasts
