Pound-to-Euro Forecast: GBP/EUR Jumps to 5-Week Best as Bears Back Off

Modified: Friday, 5 December 2025 09:46 BST - Written by Ben Hughes

STORY LINK Pound-to-Euro Forecast: GBP/EUR Jumps to 5-Week Best as Bears Back Off

The Pound-to-Euro exchange rate (GBP/EUR) climbed to five-week highs near 1.1450 as improved risk appetite and post-budget short covering lifted Sterling.

Falling volatility and stable gilt yields have eased the fiscal risk premium, though weak UK construction data highlights lingering economic challenges.

The medium-term path still hinges on rate divergence, with the ECB expected to stay on hold while the BoE cuts.

GBP/EUR Forecasts: 5-Week High

The Pound has performed strongly in global markets over the past 24 hours. There has been wider interest in risk-related currencies which has benefited the currency, although Sterling has also gained independent support.

The Pound to Euro (GBP/EUR) exchange rate hit 5-week highs just below 1.1450 before settling around 1.1425.

JP Morgan sees scope for GBP/EUR gains to 1.1630 by March, but expects a retreat to 1.1360 by the end of 2026.

Pound sentiment has improved following the budget with an element of short covering while the 10-year yield is holding below 4.50% with relief that yields have not spiked higher.

MUFG commented; “The pound has continued to recover lost ground after the last week’s UK Budget failed to provide a negative shock for the gilt market. It has encouraged a lightening of short pound positions as the fiscal and political risk premium priced into the pound has eased in the near-term.”

It added; “Implied pound volatility has dropped sharply reflecting less investor concern over a sharper sell-off now the Budget has passed.”

Danske Bank does consider that the risk of Pound selling has eased; “While a tightening of fiscal policy alongside still restrictive monetary policy provides a headwind for the UK economy, the relative growth backdrop between the euro area and the UK has become less positive for EUR/GBP in recent weeks.”

It added; “We stay bullish on EUR/GBP but highlight that the tailwinds, on balance, have lost steam as of late.”

Although there has been an easing of uncertainty after the budget, this will need to translate into an improved economic performance to trigger a sustained Sterling revival.

In this context, the UK data did not provide Pound support with the PMI construction index dipping to 39.4 for November from 44.1 previously and the lowest reading since May 2020.

Tim Moore, Economics Director at S&P Global Market Intelligence commented; “The degree of optimism dropped to its lowest since December 2022 amid reports of cutbacks to client budgets and pervasive worries about long-term UK economic growth prospects."

The Pound is also still potentially at risk on yield grounds given the divergence in expectations surrounding interest rates.

Danske Bank noted that the Euro-Zone growth outlook has been better than expected. There will be implications for interest rates with markets pricing in only around a 25% chance that the ECB will cut rates in 2026.

According to the bank; “We expect the ECB to keep the policy rate unchanged at 2.0% in both 2026 and 2027. While inflation is expected to undershoot the 2% target the decent growth outlook, tight labour market, and anchored long-term inflation expectations should keep the ECB from lowering rates further.”

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TAGS: Pound Euro Forecasts