The Pound to Euro (GBP/EUR) exchange rate briefly dipped to 6-week lows just below 1.15 as UK politician uncertainty intensified, but has recovered to around 1.1550.
Elevated UK yields have offered some Pound support and makes it expensive to short Sterling, but economic risks are also a key element.
Overall, Danske Bank expects gradual Pound losses with a 12-month forecast of 1.1240.
Danske Bank considers that the Bank of England (BoE) has time to wait on policy and, overall, considers that it will decide against rate hikes with unchanged rates throughout 2026 and 2027. It considers that there is greater scope for a repricing of BoE pricing compared with the ECB which would tend to limit Pound support.
Danske also considers that the UK economy is vulnerable with the Pound also at risk due to the on-going political uncertainty with very strong expectations that Prime Minister Starmer will face a formal leadership challenge.
On the other side of the ledger, Danske does consider that the UK economy is slightly less vulnerable than the Euro-Zone to the energy shock which could prove a limited net headwind for the Euro and limit GBP/EUR losses.
