Pound-to-Euro Week Ahead Forecast: Too Soon for the 'All Clear'
- Written by: Gary Howes
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Pound sterling has stabilised against the euro, but it's too soon to start forecasting materially higher levels.
The pound to euro exchange rate (GBP/EUR) rose a third of a per cent last week and opens the final month of the year at 1.1407.
In fact, the pair has witnessed two consecutive weekly gains, confirming that last week's highly anticipated budget didn't have the adverse effect on sterling that many in the market were expecting.
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To be sure, the budget weighed heavily, but the damage was wrought by weeks of Treasury briefings and rising anxieties over the scale of tax rises that were inevitably coming, leading the pound to steadily fall against the euro.
The market therefore front-ran the event, and its passing has triggered some relief-style buying of the pound, which is what Pound Sterling Live predicted would happen.
"The autumn statement was not the fiscal train-wreck that many feared it would be,” Credit Agricole says.
Major buyers of UK government bonds, known as gilts, are reportedly stepping up purchases, after Chancellor Rachel Reeves rebuilt 'headroom' in the budget, to the tune of £22BN. This leaves investors less concerned about the prospects of the UK's debt dynamics.
Also, headlines out Monday reveal Prime Minister Keir Starmer is to make another attempt to tackle the UK's welfare bill, having had to abandon similar plans last July, which weighed on gilts and the pound.
Any progress here would naturally be a good thing for UK assets.
Stamer is to say "we must also reform the welfare state itself — that is what renewal demands. Now this is not about propping up a broken status quo. Nor is it because we want to look somehow politically tough.
"The oversold GBP should therefore continue to take its cue from gauges of the UK’s creditworthiness and the price action in the gilt markets," says Crédit Agricole.
Despite the improved mood music, it's too soon to signal the all-clear for sterling.
GBP/EUR is now consolidating around 1.14 and has broken above the 21-day exponential moving average (EMA), which is a constructive technical development that could foreshadow the start of a rally. (See orange line in chart).
However, 2025's price action reveals that previous breaks above the 21-day EMA have failed to hold.
The chart shows that it's likely the 50-day EMA that would need to be broken in order for us to turn more bullish. As we can see, the 50-day is at 1.1422, and has been acting as a blocker to gains since August.
We'd also like the 21-day to cross above the 50-day to confirm the downtrend is truly over.
Given that the 21-day is still below the 50-day, we'd be inclined to say we're witnessing a relief bounce within a downtrend, and we are wary that this week brings a fresh move below 1.14.
So, while the background fundamentals are more constructive post-budget and advocate for further recovery, we're just not seeing this positivity yet reflected in the charts.
It could yet emerge, but until there's more confirmation our Week Ahead Forecast stays defensive and looks for further consolidation near these levels.
