Pound to Euro Rate Drops Amid Renewed UK Bond Market Woes

January 14, 2025 - Written by David Woodsmith

STORY LINK Pound to Euro Rate Drops Amid Renewed UK Bond Market Woes

The Pound Sterling slid lower vs the Euro and US Dollar on Monday as pressure mounted in the UK bond market, leading to another round of selling for government debt.

At the time of writing, the Pound to Euro (GBP/EUR) exchange rate was trading near €1.1881, down rough 0.3% from Monday’s opening levels.

The British Pound struggled on Monday as another increase in UK government borrowing costs unnerved investors.

The yield on 30-year UK gilts surged to 5.472% at the start of the session, marking its highest level since 1998.

Although a brief sense of stability returned to the bond market late last week, investor anxiety resurfaced ahead of key UK inflation data due later this week.

Sterling sentiment was further dampened by concerns that persistently high borrowing costs could force Chancellor Rachel Reeves to announce tax hikes and spending cuts sooner than expected, potentially dragging on the UK economy.

Speculation is growing over whether Reeves will wait until her Spring Budget to implement these measures or opt for an earlier intervention.

While the Euro (EUR) managed to gain ground against the Pound on Monday, it struggled to make headway against other major currencies.

This was largely due to the Euro’s negative correlation with the US Dollar (USD), which continued to strengthen at the start of the week.

The Greenback’s rally was supported by shifting Federal Reserve rate expectations, as investors grew less certain that the Fed would cut interest rates again this year.

Looking ahead, the UK’s latest inflation data is likely to dictate the direction of the GBP/EUR exchange rate in the coming days.

Economists predict inflation will edge higher in December, potentially reducing the likelihood of near-term rate cuts from the Bank of England (BoE).

However, such an outcome may exert additional pressure on the Pound, as it could exacerbate the recent spike in UK bond yields.

Meanwhile, Euro traders will be watching for a speech by European Central Bank (ECB) policymaker Philip Lane on Tuesday.

Should Lane adopt a dovish stance, it may heighten expectations for another ECB rate cut and weigh on the Euro.

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TAGS: Pound Euro Forecasts