British Pound to Euro Forecast: Has GBP Rallied Too Fast Against EUR?

Modified: Wednesday, 7 January 2026 11:01 BST - Written by Tim Boyer

STORY LINK British Pound to Euro Forecast: Has GBP Rallied Too Fast Against EUR?

The pound sterling and the euro diverged at the start of the year, with the GBP to EUR exchange rate surging to a 16-week best above 1.15 as sterling confidence improved in global markets.

Attention is now turning to whether the move can be sustained or if resistance levels will curb further gains.

GBP/EUR Forecasts: 16-Week High

The Pound has made further gains over the past 24 hours with the Pound to Euro (GBP/EUR) exchange rate surging to 16-week highs above 1.1560 amid strong Pound confidence in global markets.

SocGen notes the importance of the 200-day moving average at 1.1585. It expects solid resistance around this level, but considers that a break above this level would lead to further gains.

MUFG commented; “The price action highlights that the pound is continuing to benefit from the reduction in UK fiscal and political risks in the near-term, alongside current favourable conditions for carry trades. The pound is still one of the highest yielding G10 currencies despite the BoE’s decision to lower rates by a further 25bps to 3.75% at the end of last year.”

There will still be doubts whether Pound gains are sustainable.

MUFG also pointed out that the Pound is trading stronger than would be indicated by the current interest rates in global markets.

If the Pound traded in line with yields, GBP/EUR would be below 1.13.

In this context, The Pound will be potentially vulnerable if the economy fails to justify increased confidence or there is a slide in risk appetite.

The final reading for the UK PMI services-sector index was revised down to 51.4 for December from the flash reading of 52.1 while employment continued to decline.

Tim Moore, Economics Director at S&P Global Market Intelligence, commented; "Lacklustre business activity growth continued across the UK service sector at the end of 2025. Moreover, the speed of expansion was softer than signalled by the earlier 'flash' survey in December and lower than seen on average in the second half of the year.”

Developments surrounding inflation will also be watched closely.

Morre added; "Meanwhile, inflationary pressures across the service economy strengthened at the end of the year. Input prices rose to the greatest extent for seven months, and output charge inflation rebounded from November's recent low, despite the subdued demand backdrop."

This set of data will trigger some concerns over the risk of stagflation which would risk a dip in Pound sentiment.

Political developments will also be monitored closely with fresh expectations that the government will look to strengthen ties with the EU.

MUFG commented; “A shift back to a closer trading relationship with the EU would be welcomed by financial market participants and encourage a stronger pound.”

The bank is still doubtful that there will be a major impact; “However, the scope for a closer trading relationship in the current parliament are likely to be limited by Labour’s election manifesto pledge that “there will be no return to the single market, the customs union, or freedom of movement”. It should curtail pound upside in the near-term on back of optimism over the potential for an improvement in trading relations with the EU.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts