ExchangeRates.org.uk - The Pound to Euro (GBP/EUR) has regained the 1.20 level and is trading not far below 31-month highs above 1.21 recorded in November.NatWest (LON:NWG) expects GBP/EUR will strengthen to 1.22 at the end of 2025 on the back of yield support, but underlying UK vulnerabilities will tend to limit gains, especially if fear dominates markets.
The Pound has benefited from high interest rates during 2024, especially with the ECB cutting interest rates three times this year.
NatWest expects that interest rate trends will continue to be the key element supporting the Pound during 2025.
It assumes that the Bank of England will maintains a cautious stance towards cutting interest rates while the ECB will be more aggressive in cutting rates with the deposit rate cut to at least 2%.
The bank does expect interest rate cuts will help underpin the Euro-Zone growth outlook and GDP growth could beat the UK which will curb Euro losses.
NatWest also notes that there are significant Pound vulnerabilities.
It considers that there are only small risks associated with the budget, but it notes that the UK runs a persistent current account deficit which represents an important underlying vulnerability.
The Pound threat will be more acute if there is a much more risk-averse trend in global markets.
This content was originally published on ExchangeRates.org.uk