According to Danske Bank, weak domestic fundamentals combined with a fragile global backdrop will keep the British currency under pressure. Against this environment, the bank expects GBP/EUR to drift lower toward 1.11 over the next six months.
Following the November meeting, where the decision to keep interest rates at 4.00% passed by a very narrow margin, Danske Bank anticipates that the Bank of England may cut rates as early as December. Rate cuts typically weigh on the Pound, though Danske believes the downside will be limited, as it does not expect the Bank to reduce rates below 3.50%.
Chancellor Reeves is scheduled to present the budget next week. Broad fiscal tightening is widely expected, even though an increase in income tax rates appears to have been ruled out. Danske projects that such measures will dampen growth and market sentiment, putting additional pressure on the Pound — especially against the backdrop of fiscal expansion in Germany.
Global market conditions remain another critical factor. Danske argues that a fragile international environment will make it difficult for the Pound to gain meaningful support.