What drives the euro to pound pair?

The EUR/GBP rate is influenced primarily by central bank policies, economic data, political stability, and external market trends. Understanding these factors can help traders anticipate potential movements in the pair.

Interest rate differentials

Monetary policy decisions by the Bank of England (BoE) and the European Central Bank (ECB) can significantly affect EUR/GBP movements. If the ECB signals a more hawkish stance or tightens policy relative to the BoE, capital flows may favour euro-denominated assets, potentially strengthening the euro against the pound. 

Conversely, if UK rates are higher, sterling may find support as investors seek greater returns. Traders closely monitor GDP growth, CPI inflation, employment data, purchasing managers’ indices (PMIs), and wage growth, as these indicators influence central bank actions and market expectations.

Economic fundamentals

Economic indicators such as GDP growth rates, inflation figures (CPI), and trade balances directly affect EUR/GBP. Stronger-than-expected eurozone data can enhance the appeal of the euro, while resilient UK data may support the pound. 

For instance, if eurozone growth or inflation outpaces expectations, markets may anticipate tighter ECB policy, underpinning the euro and pushing EUR/GBP higher. Similarly, positive surprises in UK data could lend support to sterling, resulting in a lower EUR/GBP rate.

Geopolitical conditions

Government policies and political stability indirectly influence EUR/GBP. Pro-business policies, trade agreements, and stable governance typically increase currency confidence. Political uncertainty or abrupt policy shifts, however, can trigger volatility. The UK has signed trade agreements with several major economies in recent years, though a comprehensive deal with the US has not yet been concluded. 

Ongoing discussions and agreements with the eurozone and India have contributed to market sentiment, but traders remain vigilant to political developments.

External market trends

Stock market performance and global risk sentiment also influence EUR/GBP exchange rates. In periods of market optimism, investors may favour higher-yielding or riskier assets, which could benefit the pound if UK assets are attractive. 

In contrast, during bouts of risk aversion, flows may move into perceived safe havens such as the US dollar or Swiss franc, though the euro can also benefit given the size and relative stability of the eurozone. Commodity market swings may have an indirect effect on the pair, particularly where they impact risk sentiment or sectors tied to the UK or eurozone economies.

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July 9, 2025 – Written by James Fuller

STORY LINK Pound to US Dollar Forecast: GBP/USD Faces Critical Tests Ahead

The Pound to Dollar exchange rate (GBP/USD) dipped to 2-week lows at 1.3530 on Tuesday before recovering ground, but failed to hold above 1.3600 and traded just below this level.

Sustained losses below 1.3550 would trigger fresh speculation that the Pound has peaked.

According to UoB; “Downward momentum continues to build, albeit not by much. That said, the likelihood of GBP dropping to 1.3510 is increasing. Overall, only a breach of 1.3680 (‘strong resistance’ level was at 1.3700 yesterday) would indicate that the current downward bias has faded.”

Scotiabank remains bullish on the GBP/USD outlook, but uneasy over recent moves; “we look to a near-term range defined by 1.3550 support and 1.3650 resistance.”

Longer-term Bank of America is still forecasting GBP/USD will strengthen to 1.41 at the end of 2025.

Markets remain wary over the UK fiscal position. Confidence in the UK bond market remains fragile with the 10-year yield trading above 4.60% which will maintain upward pressure on debt-servicing costs.

If global bond yields continue to increase, there will be further upward pressure on UK debt-servicing with the risk of further bond selling and a doom loop.

According to ING; “We find it difficult to find factors that would bring a halt to the strong upward momentum in 30Y global rates from a structural perspective. The fiscal concerns are broad-based, with also the US and UK worrying investors.”

Scotiabank added; “market participants remain concerned about domestic political developments and ongoing uncertainty related to the fiscal outlook as UK yields hit fresh highs.”

Global turbulence sparked by US tariff policies would pose further risks.

In its latest Financial Stability Report (FSR) the Bank of England warned over damage from global trade wars.

Bank of England Governor Bailey commented; “There has been a notable change in the usual correlation patterns between the dollar and other US assets, including equities and government bond yields.”

He added; “And given these developments, the risk of sharp falls in risky asset prices, abrupt shifts in asset allocation and a more prolonged breakdown in historical correlations remains high, and vulnerabilities in market-based finance could amplify such moves which could impact the availability and cost of credit here in the UK.”

Federal Reserve policy will be a key element, especially with President Trump intensifying his attacks on Chair Powell and calling for his immediate resignation.

At this stage, markets see only around a 5% chance that rates will be cut this month with the chances of a September cut declining to around 65%.

Market pricing could change sharply if political pressure on the Fed escalates and Trump nominates a very dovish candidate to replace Powell.

Standard Chartered did note that any controversial nominations could face a tough Congressional battle; “Any future board nominee has to get through the Senate Finance Committee where Republicans have a one-vote majority.”

It added; “Thom Tillis, a conservative Republican senator on the committee, voted against the fiscal package and will not be running for re-election in 2026. He is unlikely to give a pass to a candidate he considers unqualified.”

MUFG noted that the Fed debate has been damaging; “These developments are all factors that have been undermining investor confidence over recent months.”

The bank does consider that a considerable amount of dollar negatives have now been priced in; “It’s why we are forecasting a far more modest dollar decline in H2 (-2%) than the 10.7% drop in H1.”

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July 9, 2025 – Written by Tim Boyer

STORY LINK Euro to Dollar Forecast: Fed Changes to Drive EUR/USD Gains Above 1.20

The Euro to Dollar exchange rate (EUR/USD) dipped to 10-day lows just below 1.1700 on Tuesday before trading just above this level.

Tariff developments will remain a key short-term focus while the issue of Federal Reserve personnel and independence could have huge dollar implications.

UoB sees a significant shift; “The EUR strength from late last month has ended. While there has been no significant increase in downward momentum, the current pullback in EUR could extend to 1.1660.”

On a medium-term view, Danske Bank expects Fed changes will contribute to EUR/USD gains to above 1.20.

The US and EU are continuing trade negotiations with an element of confidence that some form of framework deal will be agreed over the next few days.

The agricultural sector will inevitably be a very contentious element and could trigger a breakdown in negotiations with the US imposing a tariff level.

There would be mixed market implications with damage to the US and Euro-Zone economies.

According to ING; “Tariffs on the EU would mark an important escalation that can also harm the dollar, offsetting the hit on the euro. Anyway, the market’s baseline will probably remain that a EU-US deal should be agreed by the 1 August deadline, and EUR/USD may not drift far from the 1.16-1.18 area unless US data surprise in either direction.”

Uncertainty will still a key market element.

Kyle Rodda, senior financial markets analyst at Capital.com commented; “The delay in the imposition of new tariffs on some of the U.S.’s major trading partners to August 1 has simultaneously kicked the proverbial can down the road and supported the notion that the loftier tariff rates are a negotiating ploy.”

He added; “As a result, the markets have been left hanging, and waiting for a stronger catalyst to drive the next move.”

Ray Attrill, head of FX strategy at the National Australia Bank noted; “The market’s second take on the reciprocal tariff announcements was actually dollar negative on the view that there was as much harm, or more harm, going to be inflicted on the U.S. from these actions as elsewhere.”

He also focussed on uncertainty; “It makes markets reluctant to take a kind of positional view as to how this may play out, given uncertainty still reigns.”

Federal Reserve minutes from the June policy meeting will be released later on Wednesday.

“According to ING; “The consensus expectation is probably that two members, Bowman and Waller, will have flagged their dissent at the meeting before delivering dovish comments to the media a few days later. But if the minutes show a greater dovish front, then the dollar could take a hit as the bar for data to justify a summer cut would be lower.”

Wider Federal Reserve developments could also be a key element for currency markets and the dollar.

President Trump has stepped-up his criticism of Fed Chair Powell and called for him to resign immediately.

There is also evidence that Trump will open up a potential route to get Powell dismissed by accusing him of misleading Congress.

There have also been reports that Administration economic advisor Hassett is a main contender to replace Powell.

Fears over a politicised Fed could cause major dollar damage.

Danske Bank focussed on a potential lack of experience if there are big changes; “the USD historically trades weaker when experience in the Federal Reserve board drops and that will likely happen over the coming year.”

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July 9, 2025 – Written by Frank Davies

STORY LINK GBP/USD Forecast: Pound Sterling Price Flat as Markets Await FOMC

The Pound US Dollar exchange rate was trapped in a narrow range on Wednesday ahead of the release of the US’s latest FOMC minutes.

At the time of writing, GBP/USD was trading at approximately $1.3582, virtually unchanged from the start of Wednesday’s session.

The US Dollar (USD) trended lower on Wednesday, coming under pressure ahead of the Federal Reserve’s latest meeting minutes.

Sentiment towards the ‘Greenback’ soured earlier in the session following the announcement of fresh tariffs by President Donald Trump, which unsettled markets and added to trade policy uncertainty.

With a slight improvement in risk appetite also curbing demand for the safe-haven currency, USD struggled to attract support as investors looked ahead to the FOMC’s upcoming meeting minutes.

The Pound (GBP) found its footing on Wednesday, rebounding from earlier losses despite another quiet day on the UK economic calendar front.

Sterling’s mid-week recovery followed Tuesday’s slide, which was sparked by a downbeat fiscal forecast from the Office for Budget Responsibility (OBR).

The UK’s fiscal watchdog projected that UK government debt could climb to 270% of GDP by the 2070s, citing rising borrowing costs and mounting fiscal challenges.

Despite these concerns, the Pound managed to stabilise as markets appeared to take the long-term warning in stride, with broader risk sentiment helping to cushion GBP’s losses.

Looking ahead to Thursday’s European session, movement in the GBP/USD exchange rate will likely hinge on the Federal Reserve’s latest meeting minutes, released late on Wednesday.

Markets will be combing through the minutes for fresh insight into the Fed’s monetary policy outlook.

If policymakers strike a dovish tone and signal that rate cuts remain on the table, the US Dollar could find renewed support.

Meanwhile, with no UK economic data scheduled for release, the Pound is expected to remain at the mercy of external drivers.

In the absence of domestic catalysts, broader market sentiment will likely continue to guide GBP direction.

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TAGS: Pound Dollar Forecasts