British Pound to Euro Forecast: GBP Drifts Lower After Strong New-Year Rally

Modified: Thursday, 8 January 2026 13:16 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: GBP Drifts Lower After Strong New-Year Rally

The pound sterling’s rally against the euro lost traction near 12-week highs, with GBP to EUR exchange rate dipping modestly as global risk conditions became less supportive. Questions are re-emerging over whether the UK economy can justify sterling’s recent strength.

GBP/EUR Forecasts: Away From 12-Week Highs

After hitting 12-week highs above 1.1560 on Tuesday, the Pound to Euro (GBP/EUR) exchange rate has retreated slightly to 1.1550.

Risk conditions are slightly less favourable on Wednesday which has sapped the potential for further Pound buying.

Geo-political developments will continue to be watched closely with heightened uncertainty surrounding Greenland as President Trump continued to push for the US to gain control of the country.

Several European countries, including the UK, also agreed to put troops in Ukraine as a security guarantee if there was a peace deal with Russia.

The Pound and Euro will both tend to be at risk if risk appetite deteriorates, although Sterling would tend to more at risk if equities come under pressure.

As far as economic developments are concerned, the headline German inflation rate declined to 1.8% for December from 2.3% previously and below consensus forecasts of 2.0% while the underlying rate retreated to 2.0% from 2.6%.

For the Euro-Zone as a whole, the headline rate edged lower to 2.0% from 2.1% which was in line with expectations while the core rate came in at 2.3% compared with forecasts of an unchanged reading of 2.4%.

ING commented; “For now, implications for ECB rate expectations are likely to be limited unless inflation starts undershooting materially and consistently. By extension, the euro may not be taking many cues from the print.”

According to Rabobank; “the benign inflation data from Germany and France shifted investor’s focus to the possibility that the ECB could still cut rates if both the economy and inflation were to slip further in the months ahead. The ECB doves have been relatively quiet of late, but these kind of numbers are sufficient to keep some speculation alive.”

Germany also reported that unemployment increased 3,000 for December with the unemployment rate unchanged at 6.3%.

ING pointed to long-term weakness; “Over the last four years, German unemployment has increased by some 500,000 people. This gradual worsening reflects textbook economics: with the economy effectively stagnating for more than five years and industry facing severe structural challenges, a deterioration in the labour market was inevitable.”

As far as UK data is concerned, the construction PMI index improved only marginally to 40.1 for December from 39.4 previously, but below consensus forecasts of 42.4.

Tim Moore, Economics Director at S&P Global Market Intelligence, commented; "UK construction companies once again reported challenging business conditions and falling workloads in December, but the speed of the downturn moderated from the five-and-a-half-year record seen in November.

He added; “Despite a lifting of Budget-related uncertainty, delayed spending decisions were still cited as contributing to weak sales pipelines at the close of the year.”

Any further evidence of weak activity would tend to cap Pound support.

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TAGS: Pound Euro Forecasts