Pound to Euro Week Ahead Forecast: GBP/EUR Turns Corner

January 26, 2025 - Written by David Woodsmith

STORY LINK Pound to Euro Week Ahead Forecast: GBP/EUR Turns Corner

The Pound Sterling (GBP) overall secured a tentative recovery against the Euro (EUR) during the week amid relief that the bond market stabilised.

From 4-week lows near 1.1800, the Pound to Euro exchange rate (GBP/EUR) advanced to around 1.1860.

Bank of America (BoA) is still forecasting that GBP/EUR will strengthen to 1.25 at the end of 2025.

BNPP has greater reservations over the Pound but forecasts GBP/EUR at 1.2050 at the end of 2025.

According to BoA , Pound selling has been overdone; “Price action at the start of the year has in some sense solidified our sense that a lot of negativity is now priced in.”

It added, “The UK is set once again to outpace European growth, with a healthier policy mix to offset the worst excesses of tariffs.”

The bank also expects yields to be positive for the pound throughout the year.

The latest UK business confidence data indicated a slight improvement from December, but the underlying components were weak, with business confidence at 2-year lows.

There was evidence of increased inflation pressures within the economy while consumer confidence dipped for the month.

The data overall increased concerns over the potential stagflation threat with difficulties for the Bank of England.

BNPP is more concerned over the Pound outlook; “Now, however, we no longer think higher UK yields are beneficial for the GBP, and we do not think the GBP is pricing in sufficient risk premium to reflect a range of potential negative scenarios.”

BNPP noted two potential threats; “On the first channel, the recent rise in UK yields has increased debt servicing costs to the extent that the government no longer has sufficient headroom against its debt rule. We think this raises the prospect of a change in fiscal policy – tax rises or spending cuts – that would be negative for growth.”

Markets remain confident that the BoE will cut in February, but the long-term outlook is opaque.

BNPP added; “Our base case is for four 25bp rate cuts this year and, as this is not sufficiently priced in by front-end UK rates, we see this undermining the GBP.”

HSBC noted the risk of growth downgrades; “the Office for Budget Responsibility (OBR) was forecasting 2.0% growth in 2025. If it revises that down in March, fiscal headroom could be eroded, meaning some tightening measures are needed. That tightening in turn might reduce growth prospects further – and increase the case for rate cuts.”

MUFG noted the potential significance of US trade policy; “Market participants are less concerned over the immediate risk of higher tariffs being put in place by the US against the EU, while the unease over rising Gilt yields temporarily undermined the attractiveness of the yield pick-up in the UK that encouraged EUR/GBP to trend lower throughout last year.”

There are strong expectations that the ECB will cut interest rates by a further 25 basis points at the January policy meeting, which would take the deposit rate down to 2.75%.

Nordea commented, “Inflation is converging towards the target, the economic outlook remains challenging, and rates clearly remain in restrictive territory, calling for more gradual rate cuts.”

Credit Agricole noted that market expectations surrounding ECB rates may be too low and added, “Any such confirmation could help the EUR to turn the corner from mid-2025.”

Euro-Zone business confidence data was slightly stronger than expected for January and there could be scope for a Euro-Zone rebound.

BNPP notes the potential for increased government spending and the possibility that the Ukraine war could end; “A resolution could benefit the EUR through both the sentiment and growth channel.”

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TAGS: Currency Predictions Pound Euro Forecasts