Pound to Euro Week Ahead Forecast: Trump Inauguration, Sterling Vulnerability

January 19, 2025 - Written by David Woodsmith

STORY LINK Pound to Euro Week Ahead Forecast: Trump Inauguration, Sterling Vulnerability

Nomura notes Pound vulnerability, but it is still targeting a Pound to Euro (GBP/EUR) exchange rate to strengthen to 1.2270 at the end of 2025.

ING has shifted its forecasts and now expects GBP/EUR will weaken to 1.1765 at the end of the year.

Pound confidence dipped sharply early in the week amid a slide in UK bonds, with a jump in the 10-year yield to 16-year highs above 4.90%.

There were some fears over a re-run of the 2022 crisis,s with higher yields jeopardising the government’s economic strategy.

There was some stabilisation later in the week as the bond market recovered and yields declined.

Credit Agricole notes that the Pound has tended to come under pressure when there is a sell-off in bonds; “The UK has displayed, since Brexit essentially, and even more acutely over the past four years, a negative FX-bond differential correlation during some stress episodes.”

It added, “This underlines that FX moves in GBP and rates are driven more by inflows and outflows of capital than by the pure rate differential. The external financing issue can increase if the market cannot absorb even more public deficit but we remain far from the context of autumn 2022.”

According to ING, “Though we do not think UK comparisons to Liz Truss/Sep 2022 are fully justified, the FX options market is far more alarmed.”

Nomura considers that there is good value in buying the Pound on dips, but there are significant warning signs.

The banknotes several structural vulnerabilities; “The first is that these occurrences are becoming more common and longer lasting than in previous years. The second is that GBP’s external deficit is funded increasingly by volatile short-term inflows. The third is that valuations are rich and speculators haven’t yet shifted their positioning to be as short GBP as other currencies. The final issue is that the UK’s growth-inflation mix is worsening.”

Danske Bank; “With global financial conditions tightening and long-end global real rates moving higher, the UK is left vulnerable given its fragile fiscal position as it runs a large public debt and deficits.”

It added, “We are cautiously optimistic that the move in UK markets is overdone and expect long-end global yields to decline. More broadly, we think a relatively hawkish BoE and a growth pickup in the UK relative to the euro area in 2025 will weigh on the cross in the coming quarters.”

UK data was generally weak with November GDP growth held to 0.1% while the inflation data was weaker than expected with the core rate declining to 3.2% from 3.5%.

ING expects more substantial Bank of England interest rate cuts amid weak growth and declining inflation, which will undermine the Pound; “When it comes to BoE versus ECB market pricing of the 2025 easing cycles, the risks here are clearly to the upside for EUR/GBP. We think the BoE easing cycle will be far deeper than what is currently priced. Again, UK services inflation is key here.”

According to UBS, “Fiscal uncertainty motivated us to lift the EURGBP forecast for March to 0.84 (prev. 0.82). With our expectation for better economic growth in the UK during 2025, EURGBP should still gravitate back to 0.82 by year-end. (1.22 for GBP/EUR)

ING noted that GDP contracted in 2023 and 2024.

It expects a further struggle in 2025; “it is also becoming increasingly clear that even in a best-case scenario with reforms and investments, any new government will not try to overhaul the old economic business model, but rather try to rejuvenate the old one.”

Bank of America suggests that Euro pessimism may be overdone; “with the market consensus already being so negative and very low expectations for any EU reaction to address its challenges, including in response to US policies, we see risks for the EUR as asymmetrically positive beyond the short term and we believe that the bar is relatively low.”

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TAGS: Pound Euro Forecasts