GBP/EUR Year-End 2025 Forecast
Consensus from major banks.
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The British pound recovered from post-inflation data lows ahead of the Bank of England decision.
The Bank will lower interest rates by 25 basis points later today and signal a cautious thumbs-up to the market’s current expectation that it will raise them at least once more in the first half of next year.
How will this impact the pound?
The pound walks into the event having suffered losses in the wake of Wednesday’s inflation print, which came in well below where it was expected to land at 3.2% y/y.
This was the signal from the economy that the lowering of interest rates today won’t risk entrenching above-target inflation levels. The market also ratcheted up rate bets for 2026, now seeing a 70% chance of two further cuts next year.
This weighed on the pound.
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However, the losses weren’t as severe as we might have expected. For instance, the pound to euro exchange rate fell 0.28% on the day, which means it didn’t erase the 0.38% gain it made on Tuesday.
That gain followed a strong set of PMI data that signalled the economy picked up some momentum in December.
This suggests some support for GBP/EUR at 1.1373 for now, but be warned that some bank analysts think a march to 1.11 is highly likely in the coming weeks.
The pound to dollar exchange rate (GBP/USD) also displayed resilience, having gone as low as 1.3311 before paring the losses to close out at 1.3375.
The resilience suggests the pound is absorbing the rerating in interest rate expectations in a robust fashion.
It suggests to us that any downbeat tone by the Bank, or unusually dovish communication, won’t be too costly.
If anything, there’s scope for further resilience on a middle-of-the-road outcome. Note, there are no new forecasts and no press conference scheduled for today, which limits the degree to which the Bank can send signals.
We would however expect Governor Andrew Bailey to give one-on-one media interviews at some point this afternoon, which will keep us on our toes.
So in all, we think the pound should end the day above 1.3311 against the dollar and 1.1373 against the euro.
Key Charts:
Above: GBP/EUR is off yesterday’s lows, confirming resilience into year-end despite interest rate headwinds.
Above: GBP/USD is also holds its uptrend, despite the midweek release of below-consensus inflation data.
