The Euro to Pound (EUR/GBP) exchange rate has stabilised near six-week lows after Sterling’s strong spring rally, but Rabobank believes the balance of risks is now shifting back in favour of the Euro as expectations for aggressive Bank of England tightening continue to unwind.

According to Rabobank, Sterling’s impressive performance during March and April was driven primarily by a dramatic repricing of UK interest-rate expectations following the outbreak of the Iran conflict.

At one stage markets were pricing almost four Bank of England rate hikes this year as investors feared a prolonged inflation shock.

That view has softened considerably following weaker UK labour market and inflation releases this month.

“The combination of this week’s release of softer than expected UK labour and CPI inflation data have calmed market nerves regarding the extent of potential BoE rate hikes.”

Markets currently price around 45 basis points of tightening over the next six months, but Rabobank believes investors remain too hawkish.

“In Rabo’s view, the BoE is likely to hike only once this year to ensure that inflation expectations remain well anchored.”

The bank argues that spare capacity is continuing to build in the labour market, reducing the risk of the wage-price spiral that emerged following the 2022 energy crisis.

“The current weakness of the UK labour market contrasts markedly with its position after the 2022 energy crisis.”

Rabobank believes any further scaling back of rate-hike expectations would remove an important source of support for Sterling.

Alongside changing monetary-policy expectations, Rabobank believes UK politics could become a renewed source of volatility for the Pound during the summer months.

Recent reassurance from potential Labour leadership contender Andy Burnham regarding adherence to current fiscal rules has helped stabilise both gilt markets and Sterling.

However, uncertainty surrounding Labour’s future leadership remains an important risk factor.

“If Labour candidate Burnham wins, he would be expected to launch a leadership contest which could result in a move to the soft left for the Labour party.”

Rabobank expects both gilts and Sterling to remain sensitive to political headlines in the run-up to any potential leadership challenge.

“UK political development will remain influential in the weeks ahead.”

EUR/GBP Forecast: Rabobank Targets 0.88 in Six Months

While Sterling has recovered from its weakest levels earlier this month, Rabobank does not expect a sustained move lower in EUR/GBP.

Instead, the bank sees a period of volatile range trading before the pair gradually trends higher later this year.

“We see scope for further choppy range trading in EUR/GBP around current levels and maintain a 6-month target of 0.88.”

That forecast would imply roughly a 2% rise from current levels and broadly aligns with the majority of major bank forecasts.

Among recent EUR to GBP rate projections, ING, Citi, SEB and Scotiabank all forecast EUR/GBP rising towards 0.89-0.90 over coming quarters, while MUFG projects 0.88 and Danske Bank expects a move towards 0.89.

Goldman Sachs remains one of the more constructive houses on Sterling in the near term but still sees EUR/GBP reaching 0.88 later this year.

Rabobank’s view is that slowing UK growth, fading Bank of England tightening expectations and lingering political uncertainty will ultimately outweigh the support Sterling has received from higher gilt yields.

Rabobank expects EUR/GBP to remain volatile in the near term but believes the broader trend points higher, with fading expectations for aggressive Bank of England tightening leaving scope for a move towards 0.88 over the next six months.

EUR/GBP Forecast: Pound’s Spring Rally Looks Vulnerable

While the Pound benefited from soaring rate-hike expectations earlier this year, Rabobank argues that softer inflation data, a weakening labour market and growing political uncertainty mean that support is beginning to fade.

Unless UK economic data reaccelerates significantly, the bank expects investors to continue reducing expectations for future BoE tightening, creating a more favourable backdrop for EUR/GBP gains into the second half of 2026.