– Written by
Ben Hughes
STORY LINK Pound-to-Euro Forecast: Are GBP Bears at Risk of Short Squeeze This Week?
The Pound to Euro exchange rate (GBP/EUR) steadied near 1.14 after finding support above 1.1380, setting up a critical week dominated by the Bank of England’s rate decision.
A cut to 3.75% is widely expected, but heavy speculative short positioning leaves the Pound vulnerable to a sharp squeeze on any positive surprise.
The tone of guidance from Governor Bailey will be key in determining whether Sterling stabilises or slides.
GBP/EUR Forecasts: GBP Bears Exposed?
GBP/EUR found support above 1.1380 last Friday and has since edged back to near 1.1400.
Thursday’s Bank of England (BoE) rate call will be a key event this week with investment banks expecting a cut to 3.75%.
ING is bearish of the medium-term outlook as the BoE cuts rates; “We then look for a further 50bp of easing in 2026 – a key reason why we see EUR/GBP heading up to 0.90 next year. (GBP/EUR losses to 1.11)
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It does, however, see scope for a near-term short squeeze which could trigger sharp Pound gains, especially if the data is stronger than expected.
This is a big fundamental week for the Pound which will set the trading tone over the remainder of this year and influence the start of 2026.
As far as data is concerned, consensus forecasts are for the unemployment rate to increase to a fresh 4-year high of 5.1%. Markets will also be watching data on payrolls and earnings.
The latest inflation data is due on Wednesday with the headline rate expected to decline slightly to 3.5% from 3.6% previously with the core rate holding at 3.4%.
Consensus forecasts are for another BoE split vote, but for the committee to back a rate cut as Governor Bailey switches side.
Bailey in November wanted more evidence. Rabobank commented; “He now has what he needs.”
If rates are cut, forward guidance will be important for underlying Pound confidence.
The US government shutdown has delayed publication of CFTC data, but the latest release recorded an increase in short, speculative Pound positions to near 80,000 contracts and close to the highest figure for 10 years.
There may have been an element of short covering since the data was compiled, but there is still scope for a further closing of short positions.
ING commented; “One major threat to sterling bears, however, is positioning. Asset managers are currently running some of their shortest sterling positions in over a decade. Any positive surprises could be met with a very sharp sterling short squeeze.”
MUFG expects only temporary relief for the Pound as fundamentals fears will re-emerge; “The GBP has rebounded since last month’s Budget, which temporarily helped to ease fiscal and political concerns. We expect these risks to flare up again in the first half of next year, when local elections in May will test the Labour government’s popularity and could trigger a leadership challenge.”
The bank also expects that the Pound will be vulnerable next year; “Further gradual BoE rate cuts support our forecast for GBP to weaken against the EUR next year, alongside ongoing UK fiscal and political risks, lifting EUR/GBP closer to 0.9000.”
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TAGS: Pound Euro Forecasts
