The Euro to Pound exchange rate (EUR/GBP) closed Friday at 0.8669, slightly lower on the day but still holding close to levels last seen in early autumn, after a steady unwinding of short-sterling positions that followed November’s UK Budget.
Rabobank argues that the recent dip in EUR/GBP reflects positioning rather than a renewed vote of confidence in the UK outlook.
Pound Sterling benefitted from relief that the Budget did not trigger stress in gilt markets, but that support has faded as fresh data fail to show a convincing rebound in growth momentum.
UK consumer demand remains soft, with recent retail indicators suggesting households ended the year cautiously.
Business sentiment has stabilised in pockets, but Rabobank notes that improvements in surveys such as the Lloyds Business Barometer and the IoD confidence index look more like post-Budget relief than a genuine turning point, with confidence still close to historically weak levels.
Unless November GDP delivers an upside surprise, Rabobank expects markets to refocus on further Bank of England easing in the months ahead.
By contrast, euro area rate expectations are moving in the opposite direction, with investors increasingly open to the possibility that the European Central Bank could edge toward tightening later this year.
That policy divergence is central to Rabobank’s outlook.
While near-term trading may remain range-bound after January’s position reset, the bank sees the balance of risks tilting back toward a firmer euro as 2026 progresses.
In that context, Rabobank expects EUR/GBP to gradually edge higher over the year, driven less by euro strength alone and more by the UK’s softer growth and easing bias reasserting themselves once the post-Budget calm fades.
Other banks offer a similarly cautious tone.
RBC’s Pound‑to‑Euro forecast notes that the pair is trading near four‑month highs and projects only modest downside to around 1.1360 by the end of 2026.
RBC expects two Bank of England rate cuts this year but warns that cracks in the labour market could necessitate deeper easing, while relatively high UK yields may still offer some support.
The bank also flags political risks ahead of the May local elections but doubts they will herald a major shift in fiscal policy.
In a similar vein, Danske Bank’s latest report recommends selling GBP/EUR with a target of 1.11 and argues that stronger euro‑zone growth and structural issues in the UK economy will undermine the pound.
The Danish lender says lacklustre domestic growth and cooling inflation will allow the BoE to cut rates further, eroding sterling’s yield advantage.
It also warns that the UK has yet to tackle underlying fiscal challenges, whereas an improved euro‑zone outlook could draw investors toward the single currency.
We also recently reported how sterling held steady against both the euro and the dollar even as UK gilt yields jumped on the back of a stronger GDP print.
That view stressed that markets remain cautious; one positive reading does not constitute a trend and investors will need a series of robust data before reassessing the UK’s prospects.
With yields rising but labour market and investment concerns lingering, the pound’s resilience may prove temporary.
The combination of soft UK fundamentals, potential BoE easing and a more hawkish ECB suggests that EUR/GBP could grind higher as 2026 unfolds.
