GBP/EUR Year-End 2025 Forecast
Consensus from major banks.
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The British pound rose against the euro and dollar in the minutes following the release of consensus-beating UK wage data; however, we don’t expect gains to persist.
Average Earnings, including bonus awards, grew 4.7% in the three months to October, said the ONS, a figure which defied consensus expectations for a cooling from 4.8% in September to 4.4%.
The earnings data was therefore unexpectedly strong, and the pound rose in response:
The pound to euro exchange rate rose to 1.1382 in the minutes following the release of the jobs data, having been at 1.1367 ahead of the release.
The pound to dollar exchange rate rose from a low of 1.3355 to 1.3378.
But, the strength ends there: the ONS also said its measure of payrolled employment showed a further fall in those in work of 38K, while the revised estimate of payrolled workers in October 2025 showed a decrease of 22K.
The UK unemployment rate climbed to 5.1%, a five-year high.
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The headlines confirm a deterioration in the jobs market that should push the Bank of England into cutting interest rates again on Thursday.
However, the big takeaway from a financial markets perspective is that rise in wages.
The theory traders are working with is that elevated inflation will prop up demand in the economy, which will keep inflation elevated.
Pound sterling’s rise suggests that the elevated wages will mean the Bank of England will be seriously constrained in its ability to cut interest rates too far in 2026, for risk of stoking inflation further.
We think the pound’s gains will be limited. Why? Because the underlying data suggests the headline wage surprise will not last.
Breaking down the data, we see median pay growth is down to 2.7% y/y in November, which is entirely consistent with headline inflation falling back to 2.0%.
Slicing the data further shows that, incredibly, annual average regular earnings growth was 7.6% for the public sector and just 3.9% for the private sector.
Government spending is therefore propping up wage increases.
Above: UK payrolls show a clear trend since the 2024 election. Image courtesy of Simon French at Panmure Liberum.
“The latest data paints a gloomy picture for jobs, opportunities and growth. It reflects what businesses tell us – they are less confident about hiring staff due to sky-high employment costs and a tidal wave of new employment legislation coming down the track,” says Jane Gratton, Deputy Director of Public Policy at the British Chambers of Commerce.
The Bank of England will cut interest rates on Thursday, and the trajectory of the economy suggests further cuts in 2026.
With other central banks having ended their cutting cycles, this makes the Bank of England an outlier (alongside the Fed). It means a faster fall for UK bond yields relative to elsewhere, which will mechanically weigh on the pound against non-USD currencies.
