Pound to Euro Forecast: Gradual Net Gain to 1.2050 in Six Months

January 22, 2025 - Written by David Woodsmith

STORY LINK Pound to Euro Forecast: Gradual Net Gain to 1.2050 in Six Months

The Pound to Euro exchange rate (GBP/EUR) held above 4-month lows on Tuesday and has managed to stabilise around 1.1840 without being able to make significant headway.

Rabobank expects a gradual net gain to 1.2050 on a 6-month view.

There was further disappointing UK data with higher-than-expected government borrowing for December.

There was, however, a measured reaction in the UK bond market with the 10-year yield around 4.60% and well below 16-year highs above 4.90% recorded earlier in the month which prevented significant Pound selling.

The UK government borrowing requirement jumped to £17.8bn in December from £7.7bn the previous year and the highest December deficit for four years.

On a monthly basis, debt interest payments increased to £8.3bn from £4.5bn in December 2023 and the third-highest December figure on record.

For the first nine months of fiscal 2024/25, the deficit widened to £129.9bn from £121.0bn the previous year and the second-highest 9-month deficit on record.

Jessica Barnaby, ONS deputy director for public sector finances, commented, "Compared with December 2023, spending on public services, benefits, debt interest and capital transfers were all up, while an increase in tax receipts was partially offset by a reduction in National Insurance contributions, following the rate cuts earlier in 2024."

Capital Economics UK economist Alex Kerr noted the headline stresses; "Against a backdrop of slowing GDP growth and high interest rates, December’s overshoot in borrowing is further disappointing news for the Chancellor.”

He did add; "That said, most of the overshoot was because of a one-off payment and components that are heavily revised so the figures may not be as bad as they first appear."

Nevertheless, he still expects underlying pressure will build and that the room for manoeuvre has continued to narrow; “That combined with a weakening economy suggest that, in order to meet her fiscal rules, the chancellor may need to raise taxes and/or cut spending in the next fiscal statement on 26 March.”

As far as the Euro is concerned, there are widespread expectations that the ECB will cut interest rates by a further 25 basis points at next week’s policy meeting.

In comments on Tuesday, Bundesbank head Nagel stated that there was scope for a further cut.

ING commented; “He is generally considered among the most hawkish Governing Council members, and that was another signal there is no resistance left to the dovish front.”

President Trump has continued to warn that tariffs will be imposed on the EU, and overnight, he also indicated that the US Administration would push ahead with a 10% tariff on all Chinese imports from February 1st.

Persistent trade uncertainty and fears over an aggressive US stance are likely to hamper the Euro, especially with EU officials threatening retaliation.

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TAGS: Currency Predictions Pound Euro Forecasts