British Pound Sterling Slides Against Euro and Dollar on 2025 UK Stagnation Fears

January 2, 2025 - Written by David Woodsmith

STORY LINK British Pound Sterling Slides Against Euro and Dollar on 2025 UK Stagnation Fears

The British Pound weakened at the start of 2025, while the US Dollar made further headway against European currencies.

The Pound to Euro (GBP/EUR) exchange rate retreated to 1.2040 while the Pound to Dollar (GBP/USD) exchange rate dipped to 7-month lows at 1.2470.

There are increased market concerns that the UK economy will struggle while the Bank of England is forced to keep interest rates relatively high.

Although yields could support the Pound this could be more than offset by unease over the economy.

MUFG commented; “The recent hawkish policy shift from the Fed provides another tailwind for US dollar strength at the start of this year.”

The final Euro-Zone PMI manufacturing index was revised marginally lower to a 3-month 45.1 from the flash reading of 45.2 while the output reading dipped to a 14-month low.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “Even in December, the manufacturing sector is not delivering any holiday cheer. It is the same old story – downward. New orders have dropped even more than in the previous two months, crushing any hopes for a quick recovery. This view is backed by the accelerated decline in order backlogs.”

The UK PMI manufacturing index also retreated to an 11-month low of 47.0 for the final December reading from the flash reading of 47.3 and 48.0 for November.

Current and expected future cost increases led manufacturers to pro-actively raise their selling prices.

According to Rob Dobson, Director at S&P Global Market Intelligence; “Manufacturers are facing an increasingly downbeat backdrop. Business sentiment is now at its lowest for two years, as the new Government's rhetoric and announced policy changes dampen confidence and raise costs at UK factories and their clients alike.”

He added; “With costs expected to rise again in early-2025 as the announced Budget changes come into actual effect, the Bank of England is likely to remain cautious about further interest rate cuts despite rising signs of economic difficulties."

Nationwide reported that UK house prices increased 0.7% for December after a 1.2% increase the previous month and above consensus forecasts of a 0.1% increase.

The annual increase strengthened to 4.7% from 3.7% previously.

Housing market strength would also tend to discourage the Bank of England from cutting interest rates.

Nationwide Chief Economist Robert Gardner commented; “Upcoming changes to stamp duty are likely to generate volatility, as buyers bring forward their purchases to avoid the additional tax.”

He was still broadly positive over the outlook; “But, providing the economy continues to recover steadily, as we expect, the underlying pace of housing market activity is likely to continue to strengthen gradually as affordability constraints ease through a combination of modestly lower interest rates and earnings outpacing house price growth.”

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TAGS: Pound Dollar Forecasts Pound Euro Forecasts