– Written by
David Woodsmith
STORY LINK British Pound to Euro Forecast: GBP/EUR Lower as Sterling Relief Fades
The Pound to Euro exchange rate (GBP/EUR) fell to 1.1372 (-0.48%) as softer UK inflation cemented expectations of a Bank of England rate cut this week.
The CPI miss has undercut recent Sterling resilience, with markets now focused on how dovish Thursday’s guidance proves to be.
Any further downside will hinge on whether the BoE signals additional easing into 2026.
GBP/EUR Forecasts: 1.1400 Handle Lost
The Pound to Euro rate briefly dipped to 10-day lows just below 1.1370 on Tuesday before rebounding to above 1.14 after the latest UK business confidence data.
Markets remain very confident that the Bank of England will cut interest rates on Thursday, but there is an important element of uncertainty over the 2026 outlook.
The run of higher lows in GBP/EUR will increase confidence in a potential move to 1.1450 with further choppy trading likely.
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Caxton strategist David Stritch noted the potential for sharp Pound moves; “At last, even in these sleepy weeks before Christmas, there is still much to discuss.”
MUFG has a bearish stance; “We expect the pound to weaken further as the BoE moves to lower rates this week. The relief rally for the pound after last month’s Budget appears to have run its course now.”
Scotiabank, however, sees scope for further short covering; “We note that markets are pricing considerable easing into the short-term rates market with options still pricing a sizeable premium for protection against GBP weakness.”
The ONS reported that UK unemployment increased to 5.1% in the three months to October compared with expectations of no change at 5.0% and the highest reading for over four years.
There was a provisional 38,000 decline in payrolls for November after a revised 22,000 dip for October.
The headline increase in annual earnings slowed to 4.7% from 4.9% with underlying growth at 4.6% from 4.7%. The annual increase in private-sector wages slowed further to 3.9%.
ING commented; “Altogether, slowing wage growth combined with further signs of cooling in the wider jobs market hints at the UK becoming less of an outlier on inflation. A rate cut on Thursday is highly likely, and we expect two further moves in the first half of 2026.”
The latest UK inflation data is due on Wednesday.
According to MUFG; “The last potential banana skin for BoE rate cut expectations will be the release tomorrow of the UK CPI report for November. A significant upside inflation surprise would be required to derail a rate cut this week given slowing economic growth and loosening labour market conditions in the UK.”
The UK PMI manufacturing index improved to a 15-month high of 51.2 for December from 50.2 previously while the services-sector index advanced to 52.1 from 51.3, both sectors slightly above consensus forecasts.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “December’s flash PMI surveys brought welcome news, with businesses buoyed in part by the post-Budget lifting of uncertainty.”
Input and output charges increased at a faster rate on the month, but employment continued to decline.
Williamson considers that the data justifies a December rate cut, but added; “the path to further rate cuts in 2026 remains very data dependent, as policymakers await confirmation that price pressures are going to soften materially as the year proceeds.”
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TAGS: Pound Euro Forecasts
