British Pound to Euro Forecast: Energy Shock Weighs Ahead of BoE Call

– Written by


Ben Hughes

STORY LINK British Pound to Euro Forecast: Energy Shock Weighs Ahead of BoE Call

The Pound to Euro exchange rate (GBP/EUR) edged lower toward 1.1565 as rising energy prices and weaker risk appetite weighed on Sterling ahead of key Bank of England and ECB rate decisions.

With markets bracing for central bank guidance and heightened inflation risks from the latest energy shock, the Pound’s recent resilience is being tested amid growing concerns over UK fundamentals.

GBP/EUR Forecasts: Drifting Lower

The Pound to Euro (GBP/EUR) exchange rate was again unable to make a challenge on the 1.16 area on Wednesday and drifted weaker to 1.1565 after the US open. There was also an element of caution ahead of key interest rate announcements.

After a solid opening, the Pound was hit by a fresh dip in risk appetite and dip in equity markets amid a fresh spike in energy prices as Israel attacked a key Middle East gas field.

Rabobank is not confident over the Pound outlook; “The pound strength has been fading as the UK faces mounting vulnerabilities, including sticky inflation fuelled by higher energy prices, strained public finances, weak growth, and rising political risks.

MUFG also expressed concerns surrounding UK fundamentals; “The GBP also strengthened initially against the EUR at the start of the previous energy price shock in early 2022, although those gains proved short‑lived. 2022 was a particularly difficult year for the GBP, as it was first hit by the global energy price shock and then by former Prime Minister Liz Truss’s “Mini‑Budget” in the autumn, which severely undermined market confidence.”

MUFG still expects long-term GBP/EUR losses to 1.11 while HSBC expects GBP/EUR can hold at 1.15 by the end of 2026.

The Bank of England and ECB will both announce their interest rate decisions on Thursday. Markets expect no change in interest rates from either bank amid major uncertainty and the jump in energy prices.

According to Scotiabank; “Policymakers will not respond to short‑term volatility in energy markets, but they will monitor the inflation outlook carefully—particularly expectations and potential second‑round effects through wages, input costs, and broader pricing behaviour.”

Traders will watch the BoE vote given that higher energy prices will undermine activity as well as increasing inflation.

MUFG commented on the bank’s decision; “The Bank is expected to signal renewed concern this week about the risk of persistent inflation pressures stemming from the energy shock. In the near term, the elevated uncertainty surrounding the inflation outlook is likely to encourage a stronger majority to vote to keep rates on hold until greater clarity emerges.”

It added; “The updated communication may open the door to tighter policy if required to contain upside inflation risks, while emphasising that the policy outlook remains conditional on the duration of the energy price shock.

ING is not convinced over market pricing; “We think rate cuts are still more likely than hikes, though we could be in for a long pause should energy disruption linger.

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TAGS: Pound Euro Forecasts