Pound to Euro Hits 2025 Best, Pound Sterling Forecasts Eye 1.2200 GBPEUR

February 20, 2025 - Written by Tim Boyer

STORY LINK Pound to Euro Hits 2025 Best, Pound Sterling Forecasts Eye 1.2200 GBPEUR

The Pound Sterling failed to hold an initial spike higher against the Euro with markets waiting for business confidence data on Friday to assess whether the risk of UK economic stagflation has increased.

The increase in UK inflation for January was slightly stronger than expected, further dampening expectations of a further near-term cut in interest rates.

Global geo-political developments also remain a key element for markets with the Ukraine situation watched closely.

The Pound to Euro exchange rate (GBP/EUR) also hit a 2025 best conversion just below 1.2100 before a limited correction.

ING commented on EUR/GBP; “We’d be careful picking a bottom in the pair just yet, and a move to 0.820 is not out of scope.” (1.2200 forecast for GBP/EUR).

Danske Bank expects GBP/EUR gains to 1.2350 on a 12-month view.

The Pound to Dollar (GBP/USD) exchange rate spiked to 2-month highs at 1.2640 before a retreat to 1.2620.

Headline UK inflation increased to 3.0% from 2.5% previously, above consensus forecasts of 2.8% and the highest annual reading since March 2024.

The core inflation rate increased sharply to a 9-month high of 3.7% from 3.2% and in line with market expectations.

The CPI(H) figure, preferred by the ONS, increased to 3.9% from 3.5% and the strongest reading since January 2024.

The largest upward contribution came from transport, and food and non-alcoholic beverages while the largest downward contribution came from housing and household services.

The goods inflation rate increased to 1.0% from 0.7% with the services-sector rate increasing to 5.0% from 4.4%.

ING played down the increase in services-sector inflation; “our measure of core services, which excludes volatile items (including airfares) and rents, has shown steady improvement, now at 4.2%, down from 4.7% two months ago. We expect this benign trend in services inflation to persist in the second quarter and support our projection of one rate cut per quarter this year.”

Ruth Gregory, deputy chief UK economist at Capital Economics was slightly more cautious; “The risk is that the rise in inflation proves more persistent and rates are cut more slowly than we expect, or not as far.”

Markets now see a 17% chance of a reduction in March compared with 24% before the data with most investment banks backing the next cut in May.

According to abrdn deputy chief economist Luke Bartholomew; “Another rate cut in March looks pretty unlikely, with the Bank continuing with its gradual pace of easing for now. But any speeding up of the pace of rate cuts in the second half of the year will depend on inflation pressures heading back towards 2%.

The bilateral US-Russia talks over the Ukraine situation increased concerns that a deal over Ukraine would leave Europe isolated and exposed.

ING commented; “The euro continues to follow sentiment on the implications of Russia-US talks, and we are starting to observe some signs of relative underperformance of European currencies that we suspect will be exacerbated by Trump’s more transactional approach to European NATO allies.”

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TAGS: Currency Predictions Pound Euro Forecasts