British Pound to Euro Forecast: Inflation Falls, Yet GBP Vulnerable

Modified: Thursday, 19 February 2026 14:16 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: Inflation Falls, Yet GBP Vulnerable

The Pound to Euro exchange rate (GBP/EUR) fell to eight-week lows near 1.1430 after UK inflation slowed to 3.0% year-on-year, reinforcing expectations of a near-term Bank of England rate cut.

While headline price growth cooled in line with forecasts, stubborn services inflation at 4.4% continues to complicate the policy outlook, leaving Sterling vulnerable as markets price in easing from March.

GBP/EUR Forecast: BoE Rate Cut Bets Intensify

GBP/EUR extended its slide to test the 1.1430 area on Tuesday, its weakest level in nearly two months, before stabilising slightly around 1.1445.

The move reflected renewed pressure on Sterling rather than outright Euro strength, with traders trimming long positions as interest rate expectations shifted further in favour of BoE easing.

The Pound to Dollar (GBP/USD) also softened, trading near 1.3460, as broader markets continued to reassess UK policy prospects following the latest inflation release.

There was no renewed wave of Sterling selling after the latest CPI data, with markets having already priced in a more dovish Bank of England stance following earlier weak labour-market figures.

Morgan Stanley maintains a bearish stance on the Pound: “The combination of underpriced dovishness from the BoE and persistent risks of additional term premium in the long end both suggest GBP underperformance.”

The headline UK inflation rate dipped to 3.0% in January from 3.4% previously, in line with consensus forecasts and the lowest rate since March last year. The core rate declined to 3.1% from 3.2%, slightly above expectations for a drop to 3.0%.

The largest downward contributions came from transport, food and non-alcoholic beverages.

ONS chief economist Grant Fitzner commented: “Inflation fell markedly in January to its lowest annual rate since March last year, driven partly by a decrease in petrol prices.”

He added: “Airfares were another downward driver this month with prices dropping back following the increase in December.”

Food inflation slowed to 3.6% from 4.5% and goods inflation fell from 2.2% to 1.6%, while services inflation edged down to 4.4% from 4.5%.

ING noted lingering pressure within core components: “We calculate that the Bank’s preferred measure of ‘core services’ inflation nudged up from 4.0% to 4.3%, once volatile and indexed items are excluded.”

MUFG commented on the March meeting: “The YoY services CPI at 4.4% is well above the BoE’s projection of 4.1% providing continued evidence of sticky underlying inflation. Pricing for a 25bp cut at that meeting could well slip a little after this CPI data which should provide some support for the pound after the sell-off yesterday.”

The bank still backs a rate cut in March with a further move in June.

KPMG UK chief economist Yael Selfin expects a March cut and added: “Given the favourable inflation outlook, the Bank is expected to cut interest rates three times this year, leaving interest rates at 3% by the end of 2026.”

Ellie Henderson of Investec was more cautious: “On the economic data available to us thus far, our base case remains that the next cut will not be until April, with the fact that today’s numbers exceeded the Bank of England projection a reason to support that call.”

While inflation eased in line with expectations, persistent services price pressures complicate the Bank of England’s policy outlook.

Markets remain biased toward near-term easing, limiting the scope for a sustained Sterling recovery. However, the absence of a downside inflation surprise has helped the Pound stabilise after recent losses.

Near-term direction for GBP/EUR will depend on whether rate-cut pricing continues to adjust and whether incoming UK data reinforces or challenges the dovish narrative.

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TAGS: Pound Euro Forecasts