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Currencies direct | GBP/EUR bolstered by renewed UK economic optimism
03/06/2025
The pound euro exchange rate maintained a positive trajectory through May, with the pairing being propelled to a new eight-week high amid a more optimistic outlook for the UK economy.
What happened last month?
The pound enjoyed notable support over the past month, with GBP investors growing increasingly bullish through May.
Underpinning GBP exchange rates through the first part of the month was the Bank of England's (BoE) latest interest rate decision.
While the bank delivered a 25 basis point cut rate as expected, investors were surprised by the hawkish tilt to the bank's forward guidance, which emphasised a cautious and gradual approach to further easing.
Renewed UK economic optimism then helped to accelerate the pound's gains.
In addition to data confirming that the UK was the fastest-growing G7 country at the start of 2025, this optimism was bolstered by the UK's new trade agreements with India, the US, and the EU.
In contrast, the euro stumbled through the first half of May, with these early losses being driven in part by the single currency's negative correlation with the US dollar.
Adding to the pressure on EUR exchange rates was political uncertainty in Germany, following Friedrich Merz's initial failure to secure a parliamentary majority in the first round of voting for the chancellorship, which highlighted political divisions within the Eurozone's largest economy.
The subsequent pullback in the US dollar paved the way for the euro to rebound in the latter half of the month.
However, the euro's recovery wasn't without its hurdles. A downwards revision to Eurozone GDP in Q1, weaker-than-expected PMIs, and fresh transatlantic trade tensions all tempered demand for the euro over the past couple of weeks.
GBP/EUR forecast
A renewed focus on US trade policy could infuse fresh volatility into the FX market in the coming weeks.
Recent threats from US President Donald Trump show how the EU is acutely exposed to US tariffs. While the EU may have won a reprieve from Trump’s latest threat to impose 50% tariffs from the start of June, the risks posed to the Eurozone’s economic outlook could still hamper the euro.
Meanwhile, the latest interest rate decisions by the European Central Bank (ECB) and BoE will also be a focus. A cautious outlook from either bank could weaken their respective currencies.
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