EURGBP Outlook. Tariff Risks, Stagflation, and Carry Appeal Shape the Future
• As we had expected, the EURGBP spike in January—which was sparked by UK-idiosyncratic risks—has reversed, and we expect the pair to edge lower over the year toward 0.82.
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• While both currencies will be negatively affected, US tariffs pose a bigger risk to the EUR than the GBP. We think the market has been too complacent by not pricing in the much-related risk premium.
• Lastly, we believe carry will continue to favor GBP, but the UK’s stagflationary outlook poses a risk of FX rates decoupling further down the line.
Back to normal after a messy start to 2025
The increased EURGBP volatility in the beginning of the year was mainly driven by the GBP leg in light of growing fears of another “Truss moment.” These risks have been averted—for now: The market wobbles cooled down, volatility collapsed, and the spike in spot has largely reversed to the levels around the turn of the year. From here, we see EURGBP broadly rangebound over our forecast horizon, with risks slightly skewed to the downside over time.
Tariffs in the air
At first, the tariffs deadline imposed by the Trump administration (beginning of April) poses a bigger risk to the UK economy than the Eurozone’s. The UK’s trade surplus with the US is largely driven by service sectors such as financial and business services, which are less susceptible to direct tariff measures.
While the UK economy is also a trade-dependent and highly cyclical one, Eurozone exports to the US—such as cars—are particularly at risk of being targeted by the Trump administration. We hence see a risk of our year-end forecast of 0.82 being reached earlier in the case of a major trade escalation between the Eurozone and the US.
Economic outlook on par
However, Eurozone growth expectations were at their lowest levels at the turn of the year, and survey data in recent weeks started to surprise to the upside, albeit remaining at weak levels. This partly reflects European Central Bank’s monetary easing over the last nine months, which should eventually support the economy.
This cannot be said about the Bank of England, which is faced with a more inflationary situation and will keep rates higher for longer. While this hurts economic growth and fuels stagflation risks, it also results in more attractive GBP carry. Hence, on a total return basis we slightly favor the GBP over the EUR.
Investment considerations
Prospects
Sterling should benefit from higher carry and the Eurozone economy being more tariff-sensitive, suggesting EURGBP could fall back to 0.82 by year-end.
Boundaries
We continue to expect tight trading ranges for the pair. On the top side, we see technical resistance levels at 0.86. To the downside, 0.82 level range forms a strong floor, which we think will be tested later in the year.
Risks
While the pair seems insulated against many of the latest risk events, both US tariffs and another flaring up of UK-idiosyncratic risks could change this.
EURGBP range trading
