Pound-to-Euro Week Ahead Forecast: Struggling to Shake Downbeat Vibes

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Politics dominates in the week ahead with a key by-election that leaves the Prime Minister vulnerable. Picture by Simon Dawson / No 10 Downing Street.

The coming week will be dominated by downside trend momentum and a highly anticipated by-election that will trouble the Prime Minister.

The pound to euro exchange rate (GBP/EUR) trades at 1.1435 at the time of writing on Monday, putting it right on top of a horizontal support structure that we have been watching for some time.

The level has held the pound afloat for four successive days now, and we wrote on Friday that the pair had finally started to find a bid here.

It was our view at the time that GBP/EUR could stage a recovery towards 1.15 as part of a short-term rebound, ahead of an eventual continuation of the downtrend towards 1.1340.

However, Friday's advance didn't sustain, with the pair eking out a meagre 0.03% gain. Sure, it's still holding above support but the inability to rise is a warning that this is a market that wants to sell sterling.

If that is the case, then we'd be looking at a test of 1.14 later in the week as downside momentum resumes, ahead of an eventual test of November lows at 1.1320 in March.

Yet there's still reason to hold out for a recovery to 1.15 as the British economy looks to have started the new year on a stronger footing, confirmed by last Friday's release of PMI data that showed a strong performance in February that should mean the economy expands healthily in the first quarter.

The same release also showed that price pressures faced by UK businesses remain elevated, limiting the potential for the number of Bank of England rate cuts this year.

The pound has fallen steadily in February as markets saw rising odds for rate cuts in March and later in the year, meaning that the currency can stabilise once that process completes. A strengthening economic pulse and elevated prices would do just that.

Nevertheless, it's likely politics that the pound is watching this week, and on that front, there are risks.

Thursday's Gorton and Denton by-election is seen as another moment of vulnerability for Prime Minister Keir Starmer who is at risk of being replaced by a colleague in his Labour Party.

"The market will now start to concentrate on (this) week's UK by-election. A loss for the incumbent Labour Party in this traditional stronghold would ramp up pressure even more on PM Starmer and increase the likelihood of a change in leadership to a potentially less market-friendly combination in the months ahead, which remains an under-priced risk for GBP, in our view," says Dominic Bunning, FX Strategist at Nomura.

🎯 GBP/EUR year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. 📩 Request your copy.

A poor showing on Thursday for Labour could lead to further manoeuvring by potential challengers, which markets won't like for fear of what the replacement would do to the economy.

Labour is expected to lose the seat it has held for decades to the Green Party, with Reform likely to come in second.

Above: Polymarket suggests the Greens are likely to take the seat from Labour.

Such a result would weaken Starmer ahead of May's local elections, which are expected to see Labour suffer significant losses.

Tactically, we see a limited likelihood that someone would move against Starmer before May, as they would not want to carry the stain of these election losses, so it's likely the real threat to Starmer arrives later in the year.

Therefore, we would expect any politically inspired jitters in pound sterling to be short-lived, but nervousness could keep the currency under pressure this week.

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