The pound's journey against the euro is a captivating tale of uncertainty and potential.**
Despite the pound's recent advance, it finds itself in a delicate balance, neither ready to fall nor fully prepared for a surge. This intriguing scenario has left market watchers with a burning question: what does the future hold for the GBP/EUR exchange rate?
The current state of affairs can be described as a wedge formation, a tight and constrained range that will eventually be broken, leading to a significant move. The direction of this move is the subject of much speculation, with next week's economic data set to play a pivotal role.
Our intuition leans towards an upward move, influenced by the pound's previous uptrend and the euro's general weakness. Haruya Ida, a Reuters market analyst, supports this view, stating that "demand for the EUR looks to be waning with most pairs trading heavy."
But here's where it gets controversial... analysts are divided on the pound's prospects. While some, like Karl Schamotta from Corpay, believe the pound is fundamentally undervalued and poised for a slow recovery, the consensus forecast derived from investment banks expects the pound to fall against the euro.
So, should you convert your GBP to EUR now or wait? Our Q1 2026 forecast report, compiled from expert predictions across 30+ banks, aims to provide clarity.
If the consensus is accurate, we could see downside pressures re-emerge, potentially triggered by poor economic data indicating UK underperformance. This scenario would keep the GBP/EUR capped below the 200-day EMA and send it southward, effectively ending the rally.
However, there's a twist. Employment data, which has been on a downward trend since the new government took office in 2024, could be a key indicator. Increasing unemployment could prompt the Bank of England to consider interest rate cuts, which would impact UK bond yields and the pound's value.
But the Bank's ability to cut rates is not without constraints. Inflation data, due on Wednesday, will be a critical factor. Analysts at Pantheon Macroeconomics anticipate a surprise, with CPI inflation potentially ticking up to 3.3% in December.
For the pound to euro exchange rate to break higher, inflation and labour market data must exceed expectations, reducing the likelihood of a February rate reduction at the Bank of England. Conversely, if the data points to a weaker economy, GBP/EUR could head back towards the 1.1480 support level.
Jeremy Stretch, an analyst at CIBC, warns that "Sterling, having retaken September highs, looks susceptible for a material correction."
So, will the pound continue its upward trajectory or face a correction? The answer lies in the upcoming economic data. Stay tuned, as this story unfolds, and feel free to share your thoughts and predictions in the comments below!
