Pound-to-Euro Exchange Rate Outlook Strengthens Following UK Inflation Data

February 20, 2025 - Written by David Woodsmith

STORY LINK Pound-to-Euro Exchange Rate Outlook Strengthens Following UK Inflation Data

The British Pound edged higher against the US Dollar on Wednesday morning after UK inflation data came in hotter than expected. However, concerns over rising government borrowing costs appeared to cap Sterling’s upside.

At the time of writing, the Pound to Euro exchange rate (GBP/EUR) was trading at €1.2083, posting a modest gain on the day and hovering just below the near seven-week high reached overnight.

The Pound (GBP) edged higher on Wednesday after UK inflation came in hotter than expected.

January’s consumer price index revealed that headline inflation climbed from 2.5% to 3%, surpassing forecasts of 2.8%, while core inflation accelerated from 3.2% to 3.7%.

This followed Tuesday’s jobs report, which showed wage growth rising to an eight-month high in the final quarter of 2024.

In response, markets pared back expectations for Bank of England (BoE) interest rate cuts, lending support to Sterling.

However, concerns over rising government borrowing costs appeared to limit GBP’s gains. UK bond yields – the cost of government borrowing – surged in reaction to the inflation data.

Meanwhile, the Euro (EUR) was subdued on Wednesday due to a lack of impactful Eurozone economic data.

Additionally, market sentiment was unsettled by growing uncertainty over the situation in Ukraine. Initial optimism about a potential ceasefire had faded, with tensions emerging between the US and Europe.

US President Donald Trump had previously raised hopes of brokering a peace deal, but European leaders and Ukrainian President Volodymyr Zelenskyy have since felt sidelined as the US engages in direct talks with Russia.

Fresh remarks from Trump on Wednesday added to concerns, as he appeared to blame Ukraine for the conflict, stating that Zelenskyy ‘should have never started it’.

Looking ahead, upcoming Eurozone data on Thursday could influence the Euro.

An uptick in German producer price inflation for January may lend some support to EUR, while an expected improvement in Eurozone consumer confidence could also provide a modest boost. However, these mid-tier releases are unlikely to drive significant movement.

For the Pound, Thursday’s sole data release is the Confederation of British Industry’s (CBI) industrial trends orders. Another deeply negative reading could exert slight pressure on Sterling.

Meanwhile, developments in Ukraine may continue to impact the GBP/EUR exchange rate. Could mounting concerns over a US-brokered deal weigh on the Euro?

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TAGS: Pound Euro Forecasts