Pound-Euro Steadies But Economic Risks Point it Lower

Image © Pound Sterling Live

Sterling is attempting to stabilise against the euro, but the broader economic backdrop suggests downside risks remain firmly in place.

GBP/EUR trades at 1.1478 as investors digest the latest quarterly GDP figures, which confirm the UK economy continues to flatline.

The pair is little changed on the day, with signs that recent selling linked to rising bets on a Bank of England rate cut and political uncertainty may be easing for now.

The ONS said Thursday UK GDP grew 0.1% q/q in Q4, which is below expectations for 0.2%. The year’s growth stood at 1.3%, or 1.0% per person. 

Growth is picking up again in early 2026 according to the regular monthly surveys, but this looks to be a post-budget reflex. To be sure, expectations for lower inflation and interest rate cuts are also helping.

But the rebound can't be confused with a genuine cyclical recovery, with all signs pointing to an economy that is effectively stagnant. Read: The Worst Economy in 100 Years.

"The economy grew by just 1.3pc in 2025 as a whole, with the 2020s on course for the worst UK growth performance since the 1920s - the most dismal decade for growth in 100 years!" says Andrew Sentance, economist and former Bank of England rate setter.

Image courtesy of @sentance

Further Bank of England rate cuts are likely needed to keep this economy on the level, which should keep pound-euro pressured in a world where relative interest rate expectations are in charge of currency movements.

"The data miss should boost March OIS expectations while undermining Sterling in equal measure," says Jeremy Stretch, International Strategist at CIBC Capital Markets.

By contrast, the euro will be supported by steady European Central Bank policy in 2026 as policy makers in Frankfurt stay in their "happy place" where growth is positive and inflation hovers around the 2.0% target.

Those with GBP outgoing payments should be conservative in eyeing upside targets against the euro as momentum favours GBP buyers.

"So long as the recent weakness in hiring, coupled with the sharp slowdown in wage growth, continues, we expect a March cut from the BoE, followed by another move in June," says Francesco Pesole, FX Strategist at ING Bank. "Our view remains broadly bullish on EUR/GBP on the back of this."

ING says 0.88 remains a very realistic short-term target for EUR/GBP, which is a move in GBP/EUR down to 1.1360.

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