Pound-to-Euro Week Ahead Forecast: GBP/EUR Faces BoE Rate Cut Headwinds

Modified: Monday, 19 January 2026 07:01 BST - Written by David Woodsmith

STORY LINK Pound-to-Euro Week Ahead Forecast: GBP/EUR Faces BoE Rate Cut Headwinds

The Pound to Euro exchange rate (GBP/EUR) is struggling to build on recent gains, holding around 1.1550 as markets weigh improved UK growth data against a more challenging medium-term outlook.

Investment banks largely expect narrowing yield differentials, further BoE easing and domestic political uncertainty to keep Sterling on the defensive against the euro next year.

GBP/EUR Forecasts: Political Focus

Deutsche Bank forecasts that the Pound to Euro (GBP/EUR) exchange rate will slide to 1.11 by the middle of 2026 amid Pound vulnerability.

MUFG expects GBP/EUR losses to 1.11 at the end of the year, but Credit Agricole is backing gains to 1.1765 as the Euro struggles..

GBP/EUR is trading close to 1.1550 with a solid tone, but narrow ranges.

The latest UK GDP data was stronger than expected with 0.3% growth for November compared with consensus forecasts of a 0.1% gain, although investment banks remain cautious.

Berenberg economist Andrew Wishart still expressed reservations; “The big picture remains that the UK economy has lost momentum since the summer.”

He added; “We suspect that this soft patch will persist into 2026 amid ongoing job losses and fiscal consolidation.”

Deutsche Bank is backing two further Bank of England rate cuts in the first half of the year.

It commented; “Easing in the UK occurs at a time when most of its peers, including the ECB, are on hold. Even if already priced into the UK front-end, this further narrowing of sterling's yield advantage over the euro remains significant.”

MUFG takes a similar view; “After four quarterly rate cuts delivered in 2025, we expect two further 25bps cuts by the summer and acknowledge the risk of an additional 25bps cut to 3.00% by year-end. In contrast, we have dropped our forecast for one final ECB rate cut this year and now expect the policy rate to remain on hold at 2.00%.”

It added; “Narrowing yield differentials between the UK and eurozone should continue to encourage a weaker GBP against the EUR, lifting EUR/GBP closer to the 0.9000 level in 2026. The relationship has broken down recently as EUR/GBP has corrected lower after the Autumn Statement, but we are not convinced this will be sustained.”

Political developments will also be watched closely with crucial local elections due in July..

Deutsche Bank commented; “the Budget was delivered smoothly enough to prompt outperformance in UK bonds and the currency. However, with domestic data weakening in the background and the UK lacking the same growth impetus into 2026 as seen elsewhere in Europe, the risk-reward in the pound has once again become skewed to the downside.”

It added; “We also believe that medium-term implied volatility in EUR/GBP is currently too low.”

Relations with the EU could also be a significant element.

MUFG commented; “A shift back toward a closer trading relationship with the EU would likely be welcomed by financial markets and could support a stronger GBP. However, the scope for significant progress during the current parliament is limited by Labour’s election manifesto pledge that “there will be no return to the single market, the customs union, or freedom of movement.”

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