The GBP to EUR exchange rate has become increasingly volatile due to recent economic developments in the UK and the Eurozone. The pound (GBP) is currently under pressure, trading at 1.1347—1.1% below its three-month average of 1.1473. Concerns surrounding the UK's fiscal policy have dampened investor confidence, particularly with the upcoming budget announcement on November 26. Chancellor Rachel Reeves' decision to possibly forego income tax increases has raised questions about fiscal credibility, contributing to GBP's decline against the euro.
Analysts have noted that expectations of potential interest rate cuts by the Bank of England (BoE) are weighing heavily on the pound, leading to bearish sentiment in the options market. The Office for Budget Responsibility's down revision of productivity forecasts, predicting a £20 billion budget shortfall, has only intensified these concerns. With the pound recently weakened to its lowest in months against both the euro and the US dollar, currency experts predict continued downward pressure unless confidence in the UK’s economic management improves significantly.
On the other hand, the euro (EUR) is deriving some strength from a cautious market mood and recent Eurozone GDP data, which showed a growth uptick to 0.2%. The euro remains buoyed by its status as a safe-haven asset amid uncertain global conditions, although forecasts suggest a dovish shift in monetary policy by the European Central Bank (ECB) as it considers potential rate cuts by late 2025. This expected divergence in monetary policy between the ECB and the BoE could further amplify the pressure on GBP against EUR in the near term.
Moreover, while oil prices have been experiencing volatility with an OIL to USD price at 64.20, which is 2.2% below its three-month average, fluctuations in oil prices can influence the euro indirectly. As energy costs remain a significant concern for the Eurozone economy, sustained increases in oil prices without corresponding economic growth could provoke further instability in the EUR as well.
Overall, market participants should prepare for heightened volatility in the GBP to EUR exchange rate, driven by both fiscal uncertainties in the UK and shifting monetary policies in the Eurozone. Investors and businesses engaged in international transactions may benefit from monitoring these developments closely to mitigate foreign exchange risks.
