The Pound Struggles in the Shadow of the Euro but Holds Long-Term Upside – GBP Forecasts for 2025–2026

Since the announcement of retaliatory tariffs by Donald Trump, the British pound (GBP) has clearly underperformed the euro, despite the relatively limited direct impact of the tariffs on the UK economy. The pound’s recent weakness is largely tied to its status as one of the most risk-sensitive currencies within the G10 group. Still, analysts at Ebury remain optimistic about its prospects, citing the Bank of England’s (BoE) cautious rate-cutting path and the potential for closer economic ties with the European Union.

Key Points:

• GBP has underperformed EUR despite limited UK exposure to U.S. tariffs.
• PMI data suggests emerging weaknesses in the UK economy.
• Inflation is easing but remains above the BoE’s target.
• Labour market resilience persists despite fiscal headwinds.
• BoE cut rates in May; further reductions expected to be gradual.
• Analysts remain bullish on GBP against most major currencies.

Limited Tariff Exposure Offers Some Protection

The UK economy is relatively insulated from U.S. protectionist policies, as it relies less on transatlantic trade flows. The UK runs a trade deficit with the U.S., has already reached preliminary trade agreements, and applies a modest 10% tariff baseline. Nonetheless, investors began pulling out of the pound after April 2, favoring traditional safe havens like the Swiss franc, Japanese yen, and the euro.

Despite recent setbacks, Ebury’s analysts maintain a constructive outlook for the pound. While tepid UK economic data pose downside risks, limited trade exposure, Labour Party efforts to rebuild EU ties, and the BoE’s prudent approach to monetary easing are likely to support the currency throughout 2025.

Uncertain Economic Growth Prospects

The UK’s economic future remains complex. After stagnating in late 2024, early 2025 data has been more promising. GDP grew 0.5% in February, marking the fastest expansion since March 2024 and beating forecasts.

Still, April PMI data showed deterioration. The composite index dropped to 48.4, indicating economic contraction—the steepest decline since October 2023. Domestic businesses face rising risks, including tariffs and higher employment costs due to recent increases in national insurance contributions and the minimum wage.

Labour’s borrowing plans raise some concerns in the current environment. While UK gilt yields have recently stabilized, they remain elevated, potentially keeping mortgage rates high and squeezing household incomes, especially amid rising energy and water bills. If growth remains weak and fiscal space narrows, tax hikes later in the year may be on the table—potentially weighing on British assets.

BoE Committed to Gradual Easing

In May, the BoE cut interest rates by 25 basis points in a 5–4 vote, with two dovish members favoring a 50 basis point cut. Policymakers signaled a cautious stance, and a rate pause in June seems highly likely. Analysts anticipate no more than two additional cuts this year.

Headline inflation continues to fall, reaching 2.6% in March. The BoE slightly lowered its inflation forecast in May, largely due to lower oil prices. However, core inflation remains at 3.4%, and services inflation at 4.7%—both well above target. The BoE remains focused on inflation control rather than stimulating growth, especially as upward price pressures persist due to corporate tax hikes, energy costs, and wage increases.

GBP Likely to Strengthen

In light of recent U.S. developments, Ebury analysts have raised their GBP/USD forecast. The UK economy is better positioned to weather tariff-related turbulence due to its reliance on services rather than goods exports. The BoE’s conservative easing path also supports the pound.

While inflation and cost pressures pose domestic risks, the UK labor market remains resilient. GBP remains one of the most undervalued currencies in the G10, and further gains are likely—especially if the Labour Party moves to tighten EU relations, which could boost investor confidence.

Forecast Summary (GBP/USD, GBP/EUR, GBP/PLN)

Authors: Enrique Díaz-Alvarez, Matthew Ryan, Roman Ziruk, Michał Jóźwiak – Ebury Analysts

Source: CEO.com.pl – “The Pound in the Shadow of the Euro but with Growth Potential”