Pound to Euro Rate's Rise Seen as Tactical Ahead of a Slide Toward 1.11
- Written by: Gary Howes
Image © Adobe Images
1.15 possible ahead of year-end before a resumption lower in the new year.
The pound to euro exchange rate (GBP/EUR) has been on the rise since mid-November, consistent with the relief rally we expected to transpire following the budget.
Having risen steadily since mid-November, the pair now holds above the 50-day moving average at 1.1423, a technical development that keeps near-term risks skewed to the upside.
A further push toward 1.15 looks achievable as year-end positioning, lighter liquidity and improved post-Budget sentiment continue to wash through markets.
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But most analysts we follow are clear that this strength is tactical rather than structural, particularly as the broader trend since late summer still points lower to 1.11, a level consistent with both technical and fundamental pressures expected to reassert themselves in the first half of 2026.
The fundamental driver behind the coming bearish turn is growing evidence of meaningful central bank policy divergence, which will dominate G10 FX performance next year.
Sterling is likely to sit on the wrong side of it.
Analysts at OCBC say markets are beginning to price a meaningful gap between interest-rate paths across major economies.
"Policy Divergence for 2026? Markets are moving to price in policy divergence in 2026, with hikes projected for ECB, RBA, RBNZ and BOC while easing cycles remain firmly entrenched for Fed and BOE,” they say.
OCBC notes that while expectations may still be early or even "speculative," what matters for currency markets is momentum: "If this trend starts to gather more traction, then EUR, AUD, NZD can trade better bid with USD, GBP on the backfoot."
This shift dovetails with their broader forecasts for the first half of next year:
"As per our FX outlook 1H 2026, we are still in favour of moderate USD softness as Fed rate cuts erode carry advantage while US exceptionalism fades."
Above: GBP/EUR (top) tracks short-term bond yields lower.
Even under a softer-dollar profile, they see GBP underperforming relative to currencies backed by central banks expected to tighten policy.
According to analysis from BCA Research, the Bank of England will cut interest rates faster and further than its peers next year as the UK economy loses momentum.
This will lift UK bond values and send the yield on these bonds lower (bond value and yield are inversely correlated). In fact, BCA makes buying UK bonds a key theme for 2026:
"We were on the right side of this trade in 2025 and believe gilts are most likely to take the top spot in 2026."
This matters profoundly for sterling: As bonds rise, their yields fall, and it is the movement of yields that impacts currency movements (capital flows to where interest rates offer superior or improving returns).
A faster decline in UK yields therefore translates directly into depreciation pressure for the pound.
A slide in UK yields would leave sterling disadvantaged at precisely the moment other major central banks move in the opposite direction.
With the ECB, RBA, RBNZ and BoC all projected to be tightening or holding firm while the Bank of England loosens, the rate gap that had previously helped cushion sterling would finally give way.
This interplay between interest-rate expectations and bond-market performance is central to why analysts see only temporary upside in GBP/EUR.
