Pound to Euro Forecasters See 1.22 at Year-end

Image © Adobe Images

"A bit more juice in sterling," says Kit Juckes, head of FX research at Société Générale.

His call comes amidst an ongoing rally in the Pound to Euro exchange rate (GBP/EUR) which reached a new two-year high at 1.21 earlier this week.

Pound Sterling's gains came amid an ongoing realignment in global financial markets ahead of the second Donald Trump presidency and mounting political uncertainty in Germany.

"Germany without a government just as Europe faces a strained trade relationship with the U.S., is hardly euro-friendly," says Juckes.

"There's lots of focus on the more stable political backdrop in the UK than in Europe now," says Chris Turner, Global Head of Markets at ING Bank.

Underpinning Pound Sterling as 2024's second-best performing major currency are UK bond yields - the interest paid out by government bonds - which are worth more than their Eurozone equivalents.

This interest rate 'spread' has grown steadily over recent months, bolstering the Pound.

Above: GBP/EUR is in an uptrend.

"Going forward, we think that recent events support a continuation of GBP's relative outperformance in the coming months," says Daria Parkhomenko, a currency market strategist at Royal Bank of Canada.

Superior yield suggests international investor capital will continue to favour UK assets over those in the Eurozone, thereby underpinning support for the Pound.

"Rate differentials have moved in sterling’s favour and the currency has benefited, despite an uncertain political backdrop. For now, with the UK economy having been boosted in the short term by fiscal policy, EUR/GBP can go on edging lower," says Juckes.

Investment bank consensus forecasts update: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/EUR. Please request a copy here.

Underpinning UK bond yields is the Bank of England, which has cut interest rates twice in 2024 and looks set to cut rates once a quarter in 2025.

"The BoE should cut rates less than the ECB, leaving the pound at a slight advantage over the euro," says Asmara Jamaleh, an economist at the bank Intesa Sanpaolo.

Support for Pound-Euro stems from the fact the Bank will have cut interest rates fewer times than the European Central Bank (ECB), which underpins the widening gap between UK and Eurozone bond yields.

"On the rates front, the risk is currently tilted to a more hawkish BoE rate profile than our baseline scenario, and this means the UK will continue to have a higher level of rates than some of its peers, such as the Euro area," says Parkhomenko.

Most analysts we follow are in agreement that a key risk to the Pound's uptrend against the Euro would be an unexpected acceleration in the pace the Bank of England cuts interest rates, which would weigh on UK yields and the Pound.

Analysts at ING Bank had previously expected GBP/EUR to peak and retrace some of its 2024 gains but have recently turned "mildly bearish" on the Euro's prospects against the Pound.

"Having been hesitant in cutting rates earlier this year, we now think the ECB will turn more aggressive - especially with Trump heading to the White House in January," says Chris Turner, Global Head of Markets at ING.

The 'Trump trade' has also underpinned the Pound against the Euro, with markets judging the UK economy as less exposed to the expected tariffs than the Eurozone, which counts heavily on the export of manufactured goods.

"We think the UK is less vulnerable than other economies (e.g. EZ) to tariff risks under Trump’s presidency. That may leave the market positioned short EUR/GBP," says Parkhomenko.

The UK's exports to the U.S. consist largely of service exports (68%), which would fall outside the scope of tariffs levied on goods.

If anything, the UK could benefit from ongoing U.S. outperformance via increased service export value.

Forecasts for the Pound against the Euro

Currency analysts at Royal Bank of Canada forecast the Pound-Euro exchange rate to end 2024 at 1.22.

Société Générale also holds a year-end forecast for the conversion of 1.22.

ING Bank is "mildly bearish" on the Euro, forecasting GBP/EUR at 1.2050 by the end of the year, a target that Intesa Sanpaolo shares.