Pound to Euro (GBP/EUR) Exchange Rate Drops Amid Rising UK Borrowing Costs

January 22, 2025 - Written by Frank Davies

STORY LINK Pound to Euro (GBP/EUR) Exchange Rate Drops Amid Rising UK Borrowing Costs

The Pound declined against the Euro on Wednesday as investors reacted to an unexpected surge in UK public sector borrowing.

At the time of writing, GBP/EUR exchange rate was trading around €1.1827, down approximately 0.2% from Wednesday’s opening levels.

The Pound (GBP) faced selling pressure on Wednesday morning following the release of disappointing UK public sector borrowing data.

Figures from the Office for National Statistics (ONS) revealed that the UK government borrowed £17.81bn in December, a sharp increase from £11.8bn in November and significantly above forecasts of £14.1bn.

This marks the largest December borrowing figure in four years and highlights the growing strain on public finances as government borrowing costs continue to rise.

The unexpectedly high deficit has raised concerns about the UK’s fiscal stability. Investors fear that Chancellor Rachel Reeves may be forced to implement tax hikes or spending cuts to control the deficit, measures that could dampen economic growth and weigh further on Sterling sentiment.

The Euro (EUR) edged higher on Wednesday, benefiting from its negative correlation with the US Dollar (USD).

The Greenback struggled as doubts emerged about the timing of Donald Trump’s proposed tariffs on imports, with the president yet to take concrete action despite his campaign promises.

However, the Euro’s gains were limited by renewed speculation of a rate cut from the European Central Bank (ECB).

Dovish remarks from Joachim Nagel, one of the ECB’s typically more hawkish policymakers, reignited expectations for further monetary easing and capped the Euro’s upside.

GBP/EUR Forecast: PMI Data to Drive Exchange Rate Movement

Looking ahead, the Pound to Euro exchange rate may see volatility in response to the upcoming PMIs from both the UK and Eurozone.

UK services PMI data is expected to show another acceleration of growth in the country’s dominant services sector in December, potentially offering some support to Sterling.

Conversely, Eurozone PMI figures are forecast to indicate that the bloc’s private sector remained in contraction territory last month. Such a result could weigh on the Euro, giving the Pound an opportunity to recover some of its losses.

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TAGS: Pound Euro Forecasts