British Pound to Euro Forecast: GBP Stabilises as Markets Catch Their Breath

– Written by


David Woodsmith

STORY LINK British Pound to Euro Forecast: GBP Stabilises as Markets Catch Their Breath

The Pound to Euro exchange rate (GBP/EUR) has stabilised above recent support levels, but gains remain fragile as geopolitics and risk appetite continue to dictate near-term direction.

GBP/EUR Forecast: Maintain the Calmer Tone?

The Pound to Euro (GBP/EUR) exchange rate has again found support above 1.1450 level and edged higher to 1.1475.

There was some relief in the bond market with the 10-year yield back to 4.42% after hitting 4.5% on Tuesday.

ING commented; “Calmer markets this morning mean EUR/GBP may face some downward pressure and return below 0.870. (GBP/EUR advancing to 1.1500).

Risk conditions were slightly calmer on Wednesday, although there were still important tensions surrounding geopolitical developments. With huge events in Davos later in the day, uncertainty remained elevated and it also meant that UK data struggled to be heard above the Greenland noise, fears over trade policies and stresses in bond markets.

If equities slide again, GBP/EUR will be vulnerable to renewed losses.

The headline inflation rate increased to 3.4% for December from 3.2% the previous month and slightly above consensus forecasts of 3.3%.

The core rate, however, held at 3.2% and marginally below expectations of 3.3% for the month.

The goods inflation rate edged higher to 2.2%from 2.1% with the services-sector rate at 4.5% from 4.4%.

Food price inflation increased to 4.5% from 4.2%, but still below the Bank of England forecast of 5.3%.

Airfares, alcohol and tobacco were the biggest positive contributions to the higher headline rate.

ING expects key utility-based price increases this April will moderate from last year and commented; “more muted price rises this year should bring services inflation down from 4.5% in December to around 3% post-April.”

It added; “We expect headline CPI to get to 2% and even temporarily dip below in April. That should unlock further rate cuts in March and June, earlier than markets expect.”

MUFG notes that markets are pricing in only just above 20% chance of a rate cut in March and added; “we see scope for the BoE to cut by then given the disinflation momentum is set to continue as the labour market weakens further. That likely means GBP underperformance ahead, mainly reflected versus the euro.”

As far as the Euro-Zone is concerned, the ZEW investor confidence index improved to 40.8 for January from 33.7 previously and above consensus forecasts of 36.7 and the strongest reading since July 2024.

There was also a net improvement in the current conditions component and Danske Bank commented; “With the infrastructure package now “live,” we expect the growth momentum from Q4 2025 to continue into 2026, forecasting a 1.2% y/y rise in GDP as consumers also benefit from an increase in real incomes.

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TAGS: Pound Euro Forecasts