GBP/EUR exchange rate hit two-month high in December
The pound rose sharply above 1.14 against the euro on 3 December after the UK services PMI for the previous month was revised higher.
The pound euro exchange rate touched a five-week high in the 1.14 mid-range the following day, amid an improving risk appetite, post-budget market activity, and a lack of UK data.
The pound slipped to a nine-day low against the single currency on 12 December after GDP data showed the UK economy shrank unexpectedly by 0.1% in October, strengthening the case for the Bank of England (BoE) to cut interest rates.
The pound rallied from a 13-day low around 1.137 on 16 December following the release of forecast-beating UK jobs data. Despite showing unemployment rose to a four-year high, the figures indicated some resilience and stickier-than-expected wage growth. The pound received additional support from the UK’s services PMI, which showed the powerhouse sector expanded in December, with the score rising from 51.3 to 52.1. Meanwhile, the euro was dented by weaker-than-expected PMI results, which pointed to a contraction in business activity.
The pound tumbled around half a percent against the euro the next day after a weaker-than-expected UK inflation print intensified BoE rate cut speculation. Headline inflation cooled from 3.6% to 3.2% in November, exceeding the 3.5% forecast, while core inflation also surprised to the downside, easing from 3.4% to 3.2%.
The pound euro exchange rate jumped into the 1.14 mid-range on 18 December after the BoE’s policy meeting. Although the central bank’s rate setters voted for an expected cut and downgraded its inflation outlook, its accompanying statement suggested that future decisions will become ‘a closer call’. This pointed to a slower pace of rate reductions in 2026, supporting the pound.
Meanwhile, the euro softened despite the European Central Bank’s (ECB) rate hold and growth forecast upgrade. President Christine Lagarde dampened single currency sentiment after suggesting that a ‘stronger euro could dampen inflation’.
The pound firmed against the euro over the Christmas period, hitting a two-month high in the 1.14 mid-range on 24 December. Gains were made amid holiday-thinned trading conditions and a data dearth.
The pound euro exchange rate ended the month around 1.147.
GBPEUR: 3-Month Chart
2026 Outlook
Pound
Following the Bank of England’s (BoE) widely expected decision to lower interest rates from 4% to 3.75% in December, Governor Andrew Bailey said the bank rate is expected to fall gradually in the future. Much depends on how the economy reacts to November’s Budget. While the picture is far from clear, markets don’t expect the BoE to cut rates more than once or twice over the next year – potentially supporting the pound if rates stay higher for longer.
This outlook is supported by OECD (Organisation for Economic Co-operation and Development) inflation forecasts. Despite expecting UK consumer price inflation to ease from an average of 3.5% in 2025 to 2.5% in 2026, it cautioned that headwinds remain.
‘Elevated inflation expectations and potential second-round effects from increases in payroll taxes and the minimum wage, as well as from high food inflation, constitute an upside risk to prices,’ the OECD said, adding this may lead the BoE to maintain higher interest rates, risking slower economic growth.
Given this outlook, Barclays are expecting the next cut in March rather than February, unless economic conditions improve markedly.
However, slower growth and rising unemployment could offset these forces and undermine the pound, because they increase the probability of further BoE easing. According to KPMG UK’s latest Economic Outlook, the UK economy is expected to slow to 1.0% in 2026, down from 1.4% in 2025, and unemployment is forecast to rise to 5.2% in 2026.
Euro
The European Central Bank (ECB) unanimously voted to hold its key interest rate steady at 2% in December, as widely anticipated, and increased growth and inflation projections. This marked the fourth consecutive pause in the rate-cutting cycle that began in June 2024. Investors expect the central bank to keep rates steady in 2026, though a rate hike is not completely ruled out – a favourable forecast for the euro.
The ECB said that inflation should stabilise at the target of 2% in the medium term. However, projections for inflation were revised up to 1.9% from 1.7% in September’s assessment. So, while there might be scope to cut rates in 2026, the ECB isn’t considered in a rush to do so.
Growth forecasts also paint a positive picture for the single currency. The Eurozone economy is projected to grow by 1.1% in 2026, according to KPMG’s latest European Economic Outlook. This steady pace of growth will be supported by lower inflation, resilient consumer demand, and supportive fiscal policy.
The prospect of a peace agreement that ends the Ukraine war will be in sharp focus for euro investors in 2026. While progress was said to have been made in December by Donald Trump and Volodymyr Zelensky, they failed to reach a breakthrough on several key issues.