Pound-to-Euro Forecast: 1.20 Comes Into View

The Pound-Euro could extend gains if Eurozone growth slows sharply, while falling UK borrowing costs may help keep Sterling supported above €1.19.

The Pound to Euro (GBP/EUR) exchange rate climbed to a fresh 19-month high on Thursday, immediately following the European Central Bank’s (ECB) latest interest rate decision.

At the time of writing, the GBP/EUR exchange rate was trading at around €1.1966. Rising roughly 0.2% from the start of Thursday’s session.

DAILY RECAP:

The Euro (EUR) ticked lower against the majority of its peers on Thursday as markets digested the ECB’s latest interest rate decision.

As was widely expected ahead of its October meeting, the ECB opted to leave interest rates on hold at 2.65%.

Speaking in her accompanying press conference, ECB President Christine Lagarde repeated that the bank has not yet seen ‘risk of second round effects [of inflation]’ beyond its current projections.

While the ECB is still expected to raise rates at its December policy meeting, Lagarde’s comments dampened some of the more hawkish expectations amongst some EUR investors.

The Pound (GBP) traded with modest support on Thursday as UK borrowing costs continued to edge lower following Chancellor John Healey’s inaugural Autumn Budget.

Healey’s Budget was broadly in line with market expectations, with the Chancellor confirming £15bn of fiscal headroom against the government’s borrowing rules.

While this represented a reduction from the £23.6bn available in March, the figure was close to forecasts and suggested that the government had avoided the kind of unexpected fiscal measures that might have unsettled bond investors.

UK government bond yields subsequently moved lower, with the benchmark 10-year gilt yield falling to around 5.32% and the 30-year yield declining to approximately 5.71%.

However, Sterling’s upside potential remained limited, as GBP investors continued to digest the Office for Budget Responsibility’s (OBR) sharp downgrade to its 2027 growth forecast.

Near-Term GBP/EUR Forecast: Slowing GDP to Sink the Single Currency

Turning to the end of the week, the Pound Euro exchange rate may push higher with the publication of the Eurozone’s latest GDP figures.

Preliminary figures for the third quarter are forecast to report GDP growth in the bloc slowed from 0.6% to 0.2% as higher energy prices placed more pressure on consumers and businesses.

This may further dampen enthusiasm within the ECB to resume its hiking cycle, and trigger fresh EUR selling pressure on Friday morning.

Meanwhile, in the absence of any GBP data of note, movement in the Pound may remain tied to UK bond market movements.

Our currency coverage draws on live market data, official economic releases and published bank research.