Pound-to-Euro Forecast: GBP Drifts as BoE Divisions Persist

Modified: Monday, 22 December 2025 07:01 BST - Written by Frank Davies

STORY LINK Pound-to-Euro Forecast: GBP Drifts as BoE Divisions Persist

The Pound to Euro exchange rate (GBP/EUR) edged just above 1.14, but Sterling momentum remains fragile as markets digest a closely split Bank of England rate decision.

A narrow 5–4 vote and mixed guidance have left uncertainty over how far rates fall in 2026.

With banks sharply divided on the outlook, yield differentials and UK fundamentals remain the key swing factors.

GBP/EUR Forecasts: No harmony in the BoE

Goldman Sachs expects the Pound to Euro (GBP/EUR) exchange rate will slide to 1.11 on a 12-month view.

In contrast, HSBC expects GBP/EUR can hold at 1.14 throughout next year.

GBP/EUR secured a marginal advance to just above 1.14 during the week.

Goldman Sachs commented; “Data so far have helped support our broad view that softer growth and inflation outturns should lead Sterling to underperform over time.

The Bank of England met market expectations with a 25 basis-point cut to 3.75%.

There was a close to 5-4 vote for the move with Governor Bailey the only change from the previous meeting as he switched to back a cut.

Markets will continue to debate the 2026 outlook for rates.

According to Danske Bank; “while the MPC remains split, the hawkish voters have become less hawkish since the November meeting.”

The bank expects one further cut in April.

MUFG commented; “We thought February was a possibility prior to today but now see March as more likely.

It added; “We believe that scenario will keep our view of pound underperformance within G10 with EUR/GBP set to drift higher.”

According to Rabobank; “we expect two additional cuts in 2026, bringing the policy rate down to 3.25% as long as inflation continues to decline. In that case, the interest rate differential with the euro will narrow. Despite Prime Minister Starmer’s large majority, his low popularity and rumors of a leadership challenge weigh on market sentiment. Against this backdrop, we foresee a gradual rise in EUR/GBP.”

UK fundamentals will also remain a significant element.

CIBC commented; “The UK remains reliant on the “kindness of strangers” to fund a current account shortfall that remains around 3% of GDP.”

TD Securities is notably more confident; "We remain bullish on the GBP overall as there is scope for positioning there to improve amidst softening USD sentiment, removal of any lingering budget or political risk premia, our relatively hawkish expectations of BoE being done after one more cut and GBP's overall beta to global growth."

The ECB held the deposit rate at 2.00% at the latest council meeting while Euro-Zone growth forecasts were revised slightly higher.

MUFG had expected one more cut, but added; “With rates at neutral and inflation hovering around target, the bar for policy adjustment – in either direction – is high. We expect rates to remain unchanged in 2026.”

According to CIBC; “Further, tightening expectations into 2027 could be pulled forward, providing a tailwind for EUR. At some point however, fiscal enthusiasm will run out of steam, likely around mid-year.”

From a longer-term perspective it added; “The market could place some uncertainty premium late 2026 ahead of these changes which could weigh on EUR in H2.”

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TAGS: Pound Euro Forecasts