Pound to Euro Week Ahead Forecast: Sterling Can Extend Recovery into Another ECB Rate Cut

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Pound Sterling looks set to recover further against the Euro in a week that will be dominated by the European Central Bank (ECB) interest rate decision and German inflation release.

Ahead of Thursday's expected interest rate cut, the Pound to Euro exchange rate (GBPEUR) trades higher at 1.19, a two-week high, taking it above the 200-day exponential moving average.

If GBPEUR can hold a couple of successive daily closes above the 200 EMA, then we would confirm that a short-lived downtrend has ended and a return to levels at 1.20 and above is the preferred expectation for the coming weeks.

Above: GBPEUR at daily intervals.

The pair now trades above the nine-day EMA, and the Relative Strength Index (lower panel in the above) is once again pointed higher, signalling that short-term momentum (covering the coming hours and two to three days) is positive.

Because of this, we look for a test of 1.1950 ahead of Thursday's ECB decision and Friday's German CPI inflation release; the two events form the highlight of a week that will be devoid of UK data.

The ECB will cut interest rates by 25 basis points and will likely maintain similar guidance to previous meetings. Specifically, the ECB would indicate that it would continue to deliver further interest rate cuts if the data warranted but that there was no set path to interest rates.

Lower interest rates are needed to boost growth in the Eurozone economy, but inflationary pressures remain stubbornly above the ECB's target of 2.0%.

The ECB will welcome last week's PMI reading that unexpectedly beat expectations and suggested that the Eurozone economic data pulse had reached a nadir. This can allow the ECB to express some optimism and push back against calls to accelerate the pace of cuts, potentially boosting euro exchange rates.

However, the ECB won't say anything 'hawkish' enough to offer the euro an enduring boost, and traders should fade any dips in GBPEUR following the event.

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Economists at Barclays project that the ECB will cut its policy rate in consecutive 25bp increments at each meeting in the first half of the year, culminating in a policy rate of 2.0% by June 2025.

This is far more than is expected of the Bank of England in 2025, making it a fundamental source of upside in GBPEUR.

"The Governing Council appears committed to a gradual and cautious easing cycle," says Mariano Cena, an economist at Barclays. "This approach allows the ECB to balance the risks of prolonged inflation undershooting with ongoing concerns about weakening growth across the Euro Area."

Turning to Friday's German CPI inflation release, the expectation is that the monthly CPI rate will have flatlined at 0% in January, down from 0.5% in December.

This confirms that inflation is under control in the Eurozone's biggest country, justifying lower rates at the ECB and countering any 'hawkishness' that might have been inferred from events the day before.

GBP Better Supported

Pound Sterling looks to have finally exited the January selloff that leaves it as the worst-performing G10 currency of 2025. Declines followed a flush-out of crowded long positioning in the currency, which followed two years of outperformance.

Rising bond yields and fears of a stagnating UK economy appear to have contributed to this flush-out, as did rising market expectations for the number of Bank of England interest rate cuts in 2025.

A better-than-forecast January PMI reading, released on Friday, showed that the economy started the year with some growth, potentially easing fears that a recession was underway.

Inflation and wage growth remain elevated, ultimately limiting the GBP-negative direction of travel in interest rate expectations.

The UK economic outlook is challenging, but the gloomier reappraisal now appears 'in the price', allowing the Pound to further recover from recent lows.