UBS Forecast: Euro Zone More Vulnerable to US Tariffs, GBP/EUR to Reach 1.19 by 2026

Key Takeaways:

• GBP/EUR exchange rate dipped to an 8-month low of 1.1635 amid trade war fears before recovering slightly to 1.1665.
• UBS predicts GBP/EUR will gradually rise to 1.19 by 2026, supported by UK economic resilience and Bank of England policy.
• Eurozone faces greater risk from US tariffs (20% on EU vs. 10% on UK), while the UK’s services-heavy economy remains less exposed.
• Sterling’s volatility remains contained, with support near 1.1625 and resistance at 1.2200.

GBP/EUR Exchange Rate Dips Amid Trade War Fears

The Pound to Euro (GBP/EUR) exchange rate recently plunged to an 8-month low of 1.1635 as global markets reacted to escalating US-China and US-EU trade tensions. However, it has since recovered slightly to 1.1665, with UBS forecasting a rebound to 1.19 by 2026.

Why Is the Euro More Exposed to US Tariffs Than the UK?

UBS analysts highlight that the Eurozone economy is more vulnerable to US tariffs than the UK, citing:

• Higher US tariffs on EU goods (20%) compared to UK imports (10%).
• The UK’s larger services sector, which remains untargeted by US trade restrictions.
• Stronger Bank of England (BoE) monetary policy, which could support Sterling with higher interest rates.

Bank of England Policy to Bolster GBP/EUR

UBS expects the BoE to maintain a hawkish stance due to lingering UK inflation risks, which should strengthen the Pound against the Euro. Additionally, higher UK bond yields compared to the Eurozone could attract foreign investment, further supporting GBP.

GBP/EUR Forecast: Key Levels to Watch

• Short-term support at 1.1625 – A critical floor for Sterling.
• Resistance near 1.2200 – Selling pressure likely to emerge at higher levels.
• Medium-term target of 1.19 by 2026 – Driven by Eurozone trade risks and UK economic resilience.

Conclusion: Sterling Set for Gradual Recovery

While trade war volatility has weighed on GBP/EUR, UBS expects a steady recovery as the UK’s economic structure and monetary policy provide stability. Investors should monitor US-EU trade developments and BoE rate decisions for further clues on the Pound’s trajectory.

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