GBP/EUR exchange rate hits post-Brexit high in December
Following a relatively quiet start to the month, the pound rose sharply above the €1.21 benchmark on 10 December, reaching its highest level against the euro since Britain voted to leave the EU in 2016. The UK currency was supported by a diverging policy outlook, with the Bank of England (BoE) expected to cut rates less aggressively than the European Central Bank (ECB) amid weaker growth in the Eurozone.
The pound hit fresh multi-year highs the following two days, touching €1.215 on 12 December after the ECB actioned a widely expected interest rate cut, its fourth of the year, amid warnings of slower growth.
The pound euro exchange rate tumbled to around €1.201 on 13 December in the wake of downbeat UK GDP data. The UK economy unexpectedly contracted for a second straight month in October as concerns about the budget continued to taint confidence.
The pound edged above €1.21 on 18 December after UK inflation rose to 2.6% in November, an eight-month high, stoking speculation that the BoE would leave borrowing costs unchanged.
The UK currency continued its upward momentum versus the euro the following day, reaching the $1.21 mid-range ahead of the BoE’s interest rate decision. However, it sunk into the €1.20 mid-range despite the central bank leaving borrowing costs on hold. In an unexpected 6-3 split, a trio of officials voted to reduce rates to perk up the economy – a dovish tilt that undermined the pound.
A data lull during Christmas left the pound euro exchange rate listless. Headwinds created by concerns over the BoE’s monetary policy stance briefly dented the pair on 26 December.
The pound ended 2024 at around €1.208 against the euro.
2025 Outlook
Pound
UK inflation data and its impact on the pace of BoE interest cuts will be in sharp focus for investors in the pound in 2025. Despite a dovish tilt to the central bank’s interest rate hold in December amid growth concerns, apprehension about rising headline inflation and services price inflation will persist – potentially supporting the pound if it forces the BoE to keep rates higher for longer.
Since dropping below the BoE’s 2% target in September headline inflation has been heating up again. According to the Office for Budget Responsibility (OBR), the consumer price index is likely to average out at 2.6% in 2025, partly due to huge budgetary tax rises and spending hikes.
Similarly, services inflation, a closely watched gauge of underlying domestic price pressures, is stuck at 5% and is expected to remain around there well into the year.
Despite inflationary pressures, the BoE is expected to lower interest rates gradually in 2025.
However, investors have scaled back their expectations amid economic uncertainty to two quarter-point rate cuts from four as recently as October, with the next cut anticipated in May – a hawkish readjustment that is likely to support the pound if it plays out.
The UK currency’s gains could be limited if faltering growth caused by hotter inflation and higher interest rates increases pressure on the BoE to unwind policy to revitalise the economy.
Euro
With the battle to tame inflation in the Eurozone almost won, the ECB has been cutting interest rates at a brisk clip. But is it unwinding monetary policy fast enough to support a flagging economy that’s at risk of sliding into recession? The euro’s fortunes will be heavily influenced by economic growth in the bloc in 2025 amid headwinds from Donald Trump’s proposed trade tariffs and economic instability in Germany and France, the region’s two largest economies.
According to analysts, an urgent need to ensure long-term economic stability in the Eurozone will result in the ECB maintaining its current 25bps rate cut pace until September – a dovish outlook that could dent the euro. There could be scope for the central bank to accelerate to 50bps if economic conditions permit, heaping more pressure on the euro.
This will be dictated by key economic figures, not least GDP data from France, Germany, and the wider region. If growth disappoints, pressure will increase on the ECB to prop up the economy by making its policy less restrictive.
Inflation shouldn’t present a barrier to the ECB reducing interest rates as confidence it will cool to the central bank’s 2% target rises. They must find the right balance, however, as looser policy risks stoking inflation, a scenario that could deter the ECB from cutting rates and subsequently support the euro.
Dollar
Following their sweep of both houses of Congress, Donald Trump and the Republican party will be equipped with the power to implement looser fiscal policy, tighter immigration, and widespread trade tariffs – a potential recipe for dollar strength. Trump’s inauguration on 20 January could bolster the dollar after the President-elect said one of his first tasks will be to sign off a 25% trade tariff on Mexico and Canada.
While Trump’s proposed policies have led investors to raise bets on the Fed keeping rates higher for longer, borrowing costs are expected to fall in 2025 – the question is how much and how fast? Fed rate-setters will closely monitor US inflation figures as they search for answers.
According to a recent Bloomberg survey of economists, the annual core personal consumption expenditures price index – the Fed’s preferred gauge of inflation – will advance 2.5% on average this year, up from a previous projection of 2.3%. If this forecast proves accurate, the Fed will be expected to leave rates unchanged – a move that’s likely to support the dollar.
The Fed lowered rates for a third straight meeting in December but is now pencilling in just two quarter-point cuts this year amid sticky inflation – with the first reduction expected in June. This divergence from the ECB’s quicker pace of policy easing could fuel dollar strength against the euro.
The dollar’s gains could be limited, however, if the Trump trade – the positive market sentiment to his proposed policies – that has injected strength into the US currency since the election dissipates after his inauguration as his proposals become a reality.