Pound to Euro Exchange Rate 2025 REVIEW: First Annual Loss Since 2022

Modified: Tuesday, 30 December 2025 20:31 BST - Written by David Woodsmith

STORY LINK Pound to Euro Exchange Rate 2025 REVIEW: First Annual Loss Since 2022

The Pound to Euro exchange rate (GBP/EUR) posted significant losses for 2025 with a retreat to around 1.1450 from 1.2090 at the beginning of the year.

GBP/EUR did recover from 30-month lows below 1.13, but still posted the first annual loss since 2022 as the Euro found wider support.

Monetary policy will inevitably be a key element during 2026 with markets also wary over fiscal policy and geo-political risks.

Consensus forecasts are for limited GBP/EUR losses to 1.1360 on a 12-month view.

MUFG expects sharper losses to 1.11 by the end of 2026; “We expect the GBP to weaken further against the EUR, with EUR/GBP rising closer to 0.9000 in 2026.”

According to the bank, monetary policy will be a key element; “we expect the Bank of England (BoE) to continue loosening monetary policy in 2026, while the ECB is likely to keep rates on hold.”

It added; “Secondly, the GBP is likely to be undermined by renewed fiscal and political risks.”

The Pound was undermined by wider Euro strength during the year.

Yield spreads between the Pound and Euro were unchanged for the year, but there was a decline over the second half of the year and markets expect that there will be a further narrowing in 2026.

The Pound was hurt at times by fears over fiscal policy with expectations through most of 2025 that the government would have to increase taxes again to restore fiscal headroom.

A notable loss of support for the Labour Party and Prime Minister Starmer also increased fears over fiscal and political instability.

Chancellor Reeves did raise taxes in November, although there was a net easing of fears which helped pull the Pound away from the lows.

The Bank of England cut interest rates by 25 basis points at the February, May, August and December meetings with the cumulative 100 basis-points in easing taking base rate down to 3.75%.

There are still important divisions within the central bank, illustrated by the 5-4 vote in December.

The hawkish members remain concerned over persistent inflation while the more dovish members have focussed on the downside risks to activity and deflationary pressures.

Headline inflation increased to a peak of 3.8% from 2.5% at the beginning of 2025 before a retreat to 3.2% at the end of the year.

The core rate also peaked at 3.8% before retreating to 3.2%, unchanged from the end-2024 reading.

The ECB cut interest rates four times during 2025 with the deposit rate lowered to 2.00% from 3.00%.

Significantly, however, the last cut was made in June with no further action during the second half of the year.

At the December meeting, the central bank upgraded its growth forecast slightly while it expects inflation to settle close to the 2% target. Markets now expect no further cuts in 2026.

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TAGS: Pound Euro Forecasts