Pound-to-Euro Week Ahead Forecast: UK Growth Critical for GBP/EUR in 2026

– Written by


Tim Boyer

STORY LINK Pound-to-Euro Week Ahead Forecast: UK Growth Critical for GBP/EUR in 2026

The Pound to Euro exchange rate has eased back towards 1.15 after briefly touching 12-week highs above 1.1560.

With little fresh UK data this week, markets are increasingly focused on whether the UK economy can outperform expectations in 2026 as Bank of England rate cuts gather pace.

Diverging bank forecasts underline that growth, rather than yields alone, may prove decisive for GBP/EUR in the months ahead.

GBP/EUR Forecasts: UK growth performance critical

MUFG forecasts that the Pound to Euro (GBP/EUR) exchange rate will decline steadily during 2026 with a 12-month forecast of 1.11 amid lower interest rates.

Credit Agricole, however, forecasts GBP/EUR gains to 1.1765 by the end of this year on a stronger growth performance.

GBP/EUR jumped to 12-week highs above 1.1560 during the week before a retreat to near 1.1510.

There were no major UK developments during the week with markets monitoring geo-political developments and waiting for further evidence on the UK economic performance.

Bank of England policy will remain a key element for the Pound following the December move to cut rates to 3.75%.

MUFG expects further significant rate cuts and noted; “The MPC is still divided (as seen in the 5-4 vote to cut in Dec) but the hawks should start to acknowledge the inflation progress by being more supportive of cuts. We assume a terminal rate of 3.25% but the risk here is that the BoE has the scope to lower the policy rate to 3.00% if inflation declines are more broad-based and growth is weaker.”

Credit Agricole also sees scope for interest rate cuts, but also sees the potential for this to be positive for the Pound; “we believe that the BoE easing cycle could have a stronger positive economic impact and, together with stabilising real incomes and fiscal support, should make the UK economy more resilient, in a boost to the GBP.”

Fiscal and political developments could also be a key element during the year.

The Labour Party and Prime Minister Starmer remain in difficulties according to opinion polls with further speculation that Starmer could face a leadership challenge.

MUFG commented; “With Reform so far ahead in the polls, pressure will inevitably build for a change in leadership. This may prove counter-productive, increasing fiscal uncertainty and resulting in renewed GBP underperformance.”

Goldman Sachs also sees the risk that the Sterling risk premium will increase if there is a very poor Labour performance in the May local elections.

Elsewhere, there has been fresh talk that the Labour Party will look to forge closer ties with the EU in order to improve the UK economic performance.

Commerzbank noted difficulties in securing any deal and commented; “Access to the EU single market is also likely to be granted only in exchange for concessions. Although the foreign exchange market usually acts with foresight, doing so in the face of so many uncertainties seems exaggerated to me.”

The bank added; “If improved access to the EU single market were to materialize, the pound would benefit significantly. A differentiated examination of the effects of Brexit would also be beneficial for British politics. However, it is simply too early to factor in potential positive outcomes.”

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TAGS: Pound Euro Forecasts