Pound to Euro Rate Forecast for Week Ahead: Make or Break for Sterling Rates

December 15, 2024 - Written by Frank Davies

STORY LINK Pound to Euro Rate Forecast for Week Ahead: Make or Break for Sterling Rates

Goldman Sachs forecasts that the Pound to Euro exchange rate (GBP/EUR) will strengthen to 1.2660 at the end of 2025.

SocGen expects near-term GBP/EUR gains before a steady retreat to 1.1765 by the end of 2025.

GBP/EUR hit a 33-month high at 1.2150 during the week before a sharp retreat to 1.2025.

The ECB cut interest rates by 25 basis points, but this had been priced in and ECB rhetoric was not as dovish as expected.

SocGen notes tough resistance at 1.2200 and, technically, a break above this level could see gains to 1.2285 and 1.2500.

The sharp retreat from 1.2150 will provide some reassurance to Pound bears.

ING noted EUR/GBP support at 0.8200; “Below there, we will all be discussing this pair returning to levels last seen on the day of the Brexit vote in 2016. We think this trend is primarily being driven by the BoE versus ECB story. But warmer relations between the UK and the EU can’t hurt. Equally, the eurozone’s fiscal straitjacket should mean the UK economy does outperform in 2025.”

Nevertheless, ING does not expect sustained GBP/EUR gains through 1.2200.

SocGen notes European vulnerability. According to the bank; “We are in a period of exceptional pessimism about the economic and political outlook in Europe. We are tempted to conclude that it cannot easily get much worse, but it isn’t obvious what will make the outlook improve in the near term either.”

Despite economic vulnerability, SocGen does expect the ECB will be relatively cautious over interest rate cuts. It sees the deposit rate at 2.5% at the end of 2025 from 3.00% now, limiting potential Euro selling.

MUFG also sees ECB expectations as overdone; “The futures market currently implies the ECB cutting the key policy rate by around 160bps – we see this as excessive given the inflationary risks that could emerge in an escalation of a trade war.”

HSBC expects a firm Pound tone; “the Brexit grip on GBP has faded, and it means EUR-GBP depends much less now on domestic British politics and more on factors that shape relative growth and inflation outlooks. On this basis, although the US leaves the UK economy in the shade, we think the Eurozone faces greater challenges.”

It added; “Political uncertainty in core Europe is part of our rationale for EUR-GBP weakness, as it may limit the scope for political leaders to alleviate the Eurozone’s growth inertia.”

Political and economic developments will be important with major tensions in Germany and France.

Germany will hold elections in the new year.

MUFG sees scope for positive developments; “Political developments in Germany could potentially turn to a EUR positive development in 2025. Friedrich Merz as Chancellor could bring about much needed impetus for economic policies to boost growth. The CDU-CSU look set to lead a new coalition government and a suspension of the fiscal break would be a welcome development.”

ING expects faster BoE rate cuts will eventually sap Pound support; “The reason we are not more bearish EUR/GBP in our forecasts is that we think the BoE will crumble around February and open up to a more aggressive easing cycle. However, the risks to our [EUR/GBP] forecasts are clearly on the downside.”

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TAGS: Currency Predictions Pound Euro Forecasts