Pound to Euro Rate End-of-Year Forecast: Steady Path to 1.25 in 2025

December 22, 2024 - Written by David Woodsmith

STORY LINK Pound to Euro Rate End-of-Year Forecast: Steady Path to 1.25 in 2025

Foreign exchange strategists at HSBC forecast that the Pound to Euro (GBP/EUR) exchange rate will strengthen steadily to 1.25 at the end of 2025.

Nordea, however, expects that GBP/EUR will slide to 1.1365 at the end of next year.

GBP/EUR fleetingly hit a 33-month best at 1.2160 during the week before a sharp retreat to around 1.2060 following the Bank of England (BoE) policy meeting.

The BoE held interest rates at 4.75% at the latest policy meeting which was in line with strong consensus forecasts.

There was, however, an unexpected 6-3 vote for unchanged rates as Dhingra, Ramsden and Taylor voted for a cut.

The bank also expressed some reservations over the economic outlook and stagnation risk.

The vote plot and statement triggered stronger expectations of a cut in February and the Pound lost ground.

Danske Bank still expects a cautious BoE stance; “The still cautious guidance highlights the more gradual approach of the BoE compared to European peers. We think this supports our case of a continued move lower in EUR/GBP.”

Credit Agricole added; “All in all, it would require a shockingly fast deterioration in the UK jobs market to eventually revive the prospects of more frontloaded monetary easing than the quarterly cut being priced in by UK money markets. In the meantime, the GBP could continue to make the most of its status as a higher-yielding safe-haven proxy for the EUR.”

ING, however, expects that the BoE will be much more dovish; “The apparent growing dovish front within the MPC in spite of the latest hawkish wage data potentially suggests a greater focus on slowing activity. That reinforces our dovish view on the Bank of England for next year – we expect 150bp of cuts, against market expectations for around 55bp.”

At this stage, Nordea expects the ECB will cut rates to 2.25% by April and then turn more cautious; “After this, we do not have any rate changes in our baseline until the end of 2026. The rebound in the services PMI number earlier this week kept alive the prospect of the economy gradually recovering.”

HSBC, however, expects that the central bank will be more aggressive; “we think there is a growing risk that the ECB cuts interest rates below the perceived neutral rate to stimulate the economy, possibly even to as low as 1.00%. In doing so, this would widen the interest differential between the eurozone and UK, sending EUR-GBP lower.”

Nomura took a similar view; “We expect GBP to continue to gain ground gradually against other currencies where their respective central banks are more concerned about the downside risks to growth rather than sticky price pressures.”

HSBC also considers that the Pound structural position has improved; “Although still plagued by numerous headwinds to growth, we think the UK is better positioned to face the current set of global challenges than the eurozone.”

Bank of America noted some positioning concerns, but suggests buying on dips; “Heading into 2025, we think the case for further GBP gains are likely.”

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TAGS: Currency Predictions Pound Euro Forecasts