Sterling Rebounds on Rate Hike Hopes but GBP/EUR Outlook Remains Uncertain

The Pound to Euro exchange rate has recovered slightly from its two-month low of just below 1.1620, reaching 1.1640 after Bank of England Chief Economist Huw Pill called for a September rate hike to 4.00%.

However, there are still deep divisions within the bank over the need for higher rates, and record gilt yields, elevated energy costs, and renewed concerns over UK fiscal policy all pose challenges to Sterling.

MUFG forecasts that the Pound will retreat to 1.1430 by the second quarter of 2027 as the Bank of England decides against rate hikes, while Credit Agricole is backing gains to 1.19 by the end of next year.

The bond market has also been a key element, with the 10-year yield jumping to 18-year highs just above 5.20% before a limited retreat, increasing UK debt-servicing costs and raising concerns over fiscal policy.