Rabobank’s FX Strategy team says market pricing for up to three Bank of England rate hikes over the next year is too high, given weaker UK growth and a looser labour market. It forecasts only one BoE rate move this year.
At the start of the Iran war, market pricing shifted from expecting BoE rate cuts this year to pricing in as many as four rate hikes. The market still prices a risk of three rate hikes over a one-year view.
Looser Labour Market Reduces Hike Risk
The UK labour market has been loosening this year, implying more spare capacity and lower risk of second-round inflation effects. A repricing towards one BoE move is linked to a softer pound.
Rabobank’s central forecast is for EUR/GBP to edge higher over a 9–12 month horizon. The report notes the article was produced using an AI tool and reviewed by an editor.
Looking back at 2025, we saw the market pricing in too many Bank of England rate hikes following the start of the Iran war. As we expected, this was excessive, and the market has since adjusted its view. The repricing we anticipated has largely played out, leading to a softer sterling.
The UK labour market has indeed continued to loosen as we move through 2026. Recent data from the Office for National Statistics for the first quarter shows the unemployment rate has ticked up to 4.5%, confirming the trend of increasing spare capacity we saw developing last year. This reduces pressure on the Bank of England to consider further tightening, with headline CPI now down to 2.8%.
EURGBP Outlook And Positioning
This economic backdrop has supported the euro against the pound. Over the last nine months, the EUR/GBP exchange rate has crept up from the 0.8600 levels seen in mid-2025 to trade near 0.8850 today. The Bank of England held its main rate at 5.50% in its April meeting for the third consecutive time, reinforcing this dynamic.
Given the UK’s lacklustre growth, with preliminary Q1 GDP showing a 0.1% contraction, the path of least resistance for EUR/GBP remains to the upside. In the coming weeks, traders could consider buying EUR/GBP call options with three to six-month maturities to position for a continued gradual climb. This strategy offers a defined-risk way to benefit from further sterling weakness.
For those looking to hedge sterling-based assets, using forward contracts to lock in a future sale of GBP for EUR at current levels could be a prudent move. This protects against the expected slow depreciation of the pound. The fundamental case for a stronger euro versus the pound remains intact for now.
