EUR/GBP forecast: Bleak UK economic outlook puts pound under pressure
The British pound (GBP) struggled against its major peers, including the euro (EUR), over the summer as the energy crisis deepened, inflation rose to double digits and growth stalled, bringing the pound lower.
A political vacuum in Westminster amid the Conservative Party leadership battle saw confidence in the UK fall, adding to the pound’s woes. With a new Prime Minister, Liz Truss, in office, could the fate of the country’s national currency change?
Read on for the latest on what’s been driving the EUR/GBP and analysts’ latest euro to pound forecasts.
How has EUR/GBP moved so far this year?
The EUR/GBP started 2022 trading around 0.8340 and remained relatively range-bound across the first five months of the year. The pair traded broadly above 0.83 and mainly below 0.85 until late April. From mid-way through the second quarter, the EUR/GBP started climbing, hitting a high of 0.8720 on 14 June.
The euro failed to hold onto this strength and fell back to 0.8340 by early August. The pound could not hold onto gains, and the EUR/GBP rallied, hitting a high of 0.8676 on 2 September – a two-month high. At the time of writing on 7 September, the pair was consolidating around the 0.86 level
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What is the EUR/GBP, and what moves the pair?
The EUR/GBP represents the price of the euro against the British pound. It shows the value of €1 in pounds. For example, if the rate is 0.80, £0.80 is worth €1.
The pair is a minor forex pair and mainly of interest to euro and British forecast traders, even more so since Brexit.
Macroeconomic indicators such as inflation rates, gross domestic product (GDP), and manufacturing and service sector activity can drive currency markets. These indicators are closely watched by a country’s central bank and are used to guide monetary policy decisions.
When one central bank adopts a tighter monetary policy, such as raising interest rates and quantitative tightening, than the other currency’s central bank, the differential can influence the pair. A central bank increasing interest rates faster than another can attract more inward investment, strengthening the currency.
EUR/GBP historical price movement
The EUR/GBP rose to a 13-year high of 0.9494 on 16 March as Covid-19 spread across the UK and lockdown restrictions came into play. The pair then fell over the following months to 0.8670 by mid-April as the pandemic reached across Europe.
From this low, the price edged higher, trading in a range capped by 0.93 on the upside and 0.86 on the downside until the start of 2021.
As pandemic restrictions eased in early 2021, the pound gained in strength, pulling EUR/GBP steadily lower, reaching a low of 0.82 on 7 March 2022, a level last seen in 2016.
From the end of the first quarter 2022, the pound has come under increasing pressure against the euro as the economic outlook deteriorated.
Energy crisis and recession fears
As of early September 2022, both the UK and the EU are in a difficult economic position, with energy prices rising, inflation rampant and growth stalling.
Energy crisis
The deepening energy crisis impacts Europe and the UK amid tight gas supply and strong demand amid the fallout from the Russian war. An announcement at the end of August from Russia’s Gazprom that it has halted gas flows along the Nord Stream 1 pipeline indefinitely sent the gas price in Europe roaring higher.
In the UK, Ofgem, the British energy regulator, raised the energy price cap by 80%, meaning that households would pay significantly more each month. There was no energy price cap for businesses, which could lead to surging energy prices, putting businesses under colossal strain.
Fiscal support
In Europe, governments have been putting together support packages for businesses and the most vulnerable. For example, Germany announced a €65bn package.
However, it remains unclear how supportive this is. On the one hand, these packages could be inflationary, which ultimately may lift inflation forecasts and hurt the outlook further. On the other hand, such support could result in a softer recession.
In the UK, a leadership battle in the ruling Conservative Party that would ultimately decide the country’s next Prime Minister saw the GBP struggling over the past seven weeks. The battle created a vacuum in Westminster at a time when support was needed, hurting confidence and dragging the pound lower.
Secretary of state for foreign, commonwealth and development affairs, Liz Truss, became the new PM, and draft reports of a £130bn energy support plan are underpinning sterling.
With an extensive fiscal stimulus program, the Bank of England (BoE) could be emboldened to hike interest rates aggressively. However, the long-term impact of her massive borrowing and spending plans may not be so rosy.
Analysts at Monex, in the morning report on 6 September 6, said:
Central Banks
The European Central Bank (ECB) is playing catch up in terms of hiking interest rates. The ECB hiked rates in July for the first time in 11 years as inflation reached record levels. Since then, inflation has hit a new record high of 9.1%, unemployment has fallen to a record low and energy prices have continued rising. The bank is expected to hike rates again in September by 50 basis points.
Inflation in the UK reached double digits and a new 40-year high in July. The BoE predicts inflation will peak later this year at 13%. On 30 August, investment bank Goldman Sachs believed the peak in inflation may be closer to 22% early next year.
The BoE has hiked interest rates at every meeting since December 2021 to fight against surging prices. In the August 2022 meeting, the bank hiked rates by 50 basis points and signalled it would continue raising rates in the coming meetings.
The key interest rate level is expected to rise from its current 1.75% level, to 4.5% by May next year.
It is worth noting that with Liz Truss’ proposed energy support, the outlook could change substantially. If successful in achieving her aims, peak inflation could be lower and sooner, the UK recession could be shallower, and the UK economic recovery quicker. This may mean fewer rate hikes from the BoE.
EUR/GBP forecasts for 2022 and beyond
Analysts at Monex predicted that the EUR/GBP could rise to 0.87 in the coming three months as the pound weakens. However, across six months, they expected the EUR/GBP to fall to 0.8580 before the pound weakens again, ending 2023 at 0.894.
Analysts at ING were also bearish on the pound in their EUR/GBP forecast for 2022, saying:
ING analysts expected the GBP to weaken and the pair to rise modestly in the final quarter to end 2022 at 0.86. They forecast the pound could weaken further against the euro, pushing EUR/GBP to 0.87 by the second quarter of 2023 and up to 0.88 by the end of the year.
Analysts at Citibank highlighted the importance of Liz Truss’ next steps to shore up the economy by influencing the pound:
As of 6 September, TradingEconomics considered that the pound could weaken against the euro heading towards the end of the year. Its EUR/GBP forecast predicted the pair could be at 86.51 by the end of Q3 2022 and continue weakening to 0.8670 in 12 months.
Algorithm-based forecaster Wallet Investor also predicted that the pound could weaken very slightly in the coming month. The service’s EUR/GBP forecast had the pair ending 2022 at 0.8611. However, its EUR/GBP forecast for 2025 saw the pound strengthening against the euro, and the pair falling to 82 by the end of the year.
Meanwhile, AI Pickup’s EUR/GBP prediction for 2025 also saw the pair weakening to 0.76. The service’s EUR/GBP forecast for 2030 was at 0.74.
It is important to remember that analysts’ and algorithm-based euro to pound forecasts can be wrong. Always conduct your due diligence before trading, looking at the latest news, technical and fundamental analysis, and analyst commentary. Past performance does not guarantee future returns. And never trade money that you cannot afford to lose.
FAQs
Why has EUR/GBP been rising?
The EUR/GBP rate has been rising in recent months as the economic outlook for the UK deteriorates rapidly. High energy prices, rampant inflation and an economy teetering on the brink of a recession have dragged the British pound lower against the euro.
Will EUR/GBP go up or down?
Whether the EUR/GBP goes up or down could depend on the outlook for the eurozone and UK economies and the monetary policy stance of the Bank of England (BoE) and European Central Bank (ECB) to rising inflation and the threat of recession, among other factors.
When is the best time to trade EUR/GBP?
The busiest time for the EUR/GBP market is typically during European trading hours between 07:00-16:00 GMT. Eurozone and UK major macroeconomic data and monetary policy statements are released during this time frame and tend to drive volatility in the pair cresting trading opportunities..
Is EUR/GBP a buy, sell or hold?
Whether you consider EUR/GBP a buy, sell, or hold is a personal decision. You should conduct your own research to understand the latest market trends, news, and analysis while basing your decision on your risk tolerance, investing strategy, and portfolio composition. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.
