Title: Pound Sterling Forecast to Slide Against Euro in 2026: Rabobank Projects GBP/EUR to Hit 1.124
Author Credit: Based on original analysis by James Hirai, Exchange Rates UK
Rabobank analysts have revised their long-term currency forecasts and now predict that the British pound (GBP) will weaken against the euro (EUR) heading into 2026. According to a detailed research note, the Dutch banking institution expects the GBP/EUR exchange rate to decline to around 1.124 by the end of 2026, suggesting that the pound’s recent resilience may be fading under near-term economic pressures and longer-term structural challenges.
This article explores Rabobank’s outlook, key motivations behind their forecast, UK and Eurozone economic dynamics, as well as how external factors such as central bank policy divergence, inflation, and trade balances are impacting the currency pair.
Key Forecast Summary
– Rabobank expects GBP/EUR to drift lower towards 1.124 by late 2026.
– Anticipated softening in UK economic growth and a dovish stance from the Bank of England (BoE) are contributing factors.
– The euro is projected to remain relatively stable, supported by a stronger services sector and tighter fiscal policy from euro area governments.
– A worsening UK current account deficit and lingering Brexit-related trade disruptions may put long-term pressure on sterling.
– Investor appetite for UK assets is likely to weaken relative to core Eurozone asset classes.
Rabobank’s analysis focuses on structural macroeconomic trends and central bank policy considerations to explain their prognosis. This section dives deeper into those factors, alongside other forecasts from credible financial sources.
Pound Weakness: Drivers Behind the Forecast
1. UK Economic Growth Challenges
The UK’s economic backdrop heading into 2026 appears less favorable than that of the Eurozone. While the British economy did demonstrate resilience following the immediate post-Brexit and pandemic periods, Rabobank notes that forward-looking indicators of growth momentum remain muted.
– Real GDP growth in the UK has slowed from its 2021–2022 recovery pace.
– Business investment remains weak, largely due to uncertainty over trade relationships and regulatory divergence from the EU.
– Consumer spending continues to be constrained by elevated household debt and housing cost pressures.
– The Office for Budget Responsibility (OBR) projects only modest economic growth of around 1.6–1.8 percent annually heading into 2025 and 2026.
These fundamental growth constraints reduce the likelihood of higher interest rates and stronger capital inflows into the UK, dampening long-term sterling demand.
2. Dovish Outlook for the Bank of England
The Bank of England, facing a delicate balance between controlling inflation and supporting a stagnating economy, appears closer to cutting interest rates than the European Central Bank (ECB). Rabobank expects a dovish pivot from the BoE over the next year, which could weaken the pound.
– UK inflation, while still high by historical standards, has shown signs of moderation and is expected to approach the BoE’s 2 per cent target in 2025.
– This may encourage policymakers to begin trimming rates from the current level of 5.25 per cent, particularly if the UK economy enters a mild recession or experiences slowing wage growth.
– Lower rates would reduce the appeal of UK gilts relative to Eurozone government bonds, pushing investors toward the euro.
Moreover, the pound typically benefits from monetary policy divergence when the BoE is more hawkish than its peers. With the roles reversing, sterling could face downside pressure in 2026.
3. UK Current Account Deficit and Capital Inflows
Rabobank also highlights the UK’s persistent current account deficit as a vulnerability. A country with a current account deficit requires capital inflows to stabilize its currency. Without sufficient foreign investment, the pound tends to weaken.
– The UK’s current account deficit widened to nearly 3.5 per cent of GDP in 2022, with only limited improvement projected for subsequent years
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