British Pound to Euro Forecast: GBP Lags EUR as Yield Spreads Narrow

Published: Friday, 12 December 2025 10:00 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: GBP Lags EUR as Yield Spreads Narrow

The Pound-to-Euro exchange rate (GBP/EUR) edged down to around 1.1420 as the Euro outperformed ahead of next week’s BoE and ECB decisions.

With markets confident the BoE will cut to 3.75% and increasingly sceptical of any further ECB easing, narrowing yield spreads continue to pressure Sterling.

Weak UK GDP data on Friday could add to the downside risk.

GBP/EUR Forecasts: Sterling Edges Lower

Sterling has not been able to keep pace with the Euro and the Pound to Euro (GBP/EUR) exchange rate has retreated to near 1.1420.

Markets remain very confident that the Bank of England will cut interest rates to 3.75% at next week’s policy meeting and are more confident that there will be at least two further cuts next year.

In contrast, markets are increasingly sceptical that the ECB will cut rates again with expectations that narrower yield spreads will undermine the Pound.

With markets more confident surrounding the Euro-zone growth outlook, the Pound will be vulnerable if there is weak UK data with the latest GDP data on Friday.

Consensus forecasts are for 0.1% growth for October after a 0.1% decline the previous month.

Looking at the BoE, there are expectations of a split vote within the 9-person committee, but investment banks expect a majority will back a cut with a notable focus on Governor Bailey.

MUFG commented; “While Greene may vote to hold in December, Governor Bailey will likely vote to cut along with the other members who voted to cut in November. With inflation and wage growth then set to slow further in our view, we maintain that the MPC can cut twice further in 2026.”

A rate cut is nearly fully priced in December although three cuts in total over the next 12mths is not fully priced and there is scope for front-end yields to decline further. Weaker employment and slowing inflation plus uncertainty over tax increases ahead will likely see pound underperformance continue with EUR/GBP drifting higher.

BlueBay chief investment officer Mark Dowding commented; “Prospects for weaker UK growth suggest scope for the Bank of England to surprise with more interest rate cuts than markets currently discount.”

The ECB will announce its latest rate decision just after the BoE policy decision.

Danske Bank commented; “We expect the ECB to leave the deposit rate unchanged at 2.0% on Thursday 18 December in line with consensus and market pricing. Data has come in stronger than expected by ECB staff, so we expect an upward revision to the growth forecasts amid inflation little changed. We see the ECB holding rates steady at 2.0% in both 2026 and 2027.”

ING added; “Also helping has been a string of ECB optimists referencing growth surprising on the upside. An additional ECB rate cut has now been priced out, but it may be far too early for the market to have the confidence to price in 2026 ECB rate hikes.”

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TAGS: Pound Euro Forecasts