Sterling has broken through the psychologically significant €1.20 level against the euro, reaching its highest point in approximately 19 months and marking a major milestone in the pound's recovery. The currency pair has now returned to levels last seen in April 2025, supported by improving confidence in the UK economy, favourable interest-rate differentials and mounting economic and political pressures across Europe.
The rally highlights an increasingly clear divide between the UK and eurozone outlooks. While sterling has demonstrated resilience, the euro continues to face considerable headwinds, raising questions about whether the pound's momentum has further to run.
UK Budget: Fiscal Stability Provides Sterling with Support
The UK's Autumn Budget has helped reinforce confidence in sterling, with Chancellor John Healey delivering a measured fiscal package that avoided the market disruption investors had feared. The government's commitment to fiscal discipline, alongside an upgrade to the UK's 2026 growth forecast to 1.2%, has provided reassurance despite continued pressure on public finances.
Government borrowing costs eased following the announcement, suggesting markets were broadly comfortable with the Treasury's approach. Although the economic outlook remains challenging, particularly with growth expected to moderate in 2027, the absence of a major fiscal shock has allowed investors to refocus on the UK's underlying economic resilience.
For sterling, the Budget's greatest contribution may simply have been the uncertainty it removed.
ECB: Inflation Pressures Meet a Fragile Growth Outlook
The European Central Bank faces an increasingly uncomfortable balancing act. At its October meeting, policymakers held interest rates unchanged, maintaining the deposit rate at 2.50%, while warning that rising energy prices threaten to push inflation higher and weaken economic growth.
Higher energy costs, tightening financial conditions and subdued growth prospects are creating a difficult environment for the eurozone. The ECB must remain alert to persistent inflation without placing further pressure on already vulnerable economies.
Meanwhile, the Bank of England's benchmark interest rate remains at 3.75%, maintaining a meaningful interest-rate advantage over the eurozone. This differential continues to offer support for sterling, particularly as investors assess the contrasting economic challenges facing the two regions.
EUR/USD: A Broader Story of Euro Weakness
The euro's difficulties extend beyond its performance against sterling. EUR/USD has also come under pressure, trading around the $1.11 region as investors respond to contrasting economic conditions in the United States and Europe.
The Federal Reserve's decision to maintain interest rates at 3.75%–4.00% has reinforced the dollar's relative yield appeal. Resilient US economic activity, persistent inflation and a cautious approach to monetary policy have helped sustain demand for the greenback, even as investors continue to assess the longer-term outlook for American growth.
Importantly, sterling has demonstrated greater resilience against the dollar than the euro. This divergence suggests that GBP/EUR's advance reflects more than simply renewed confidence in the pound. It also highlights a broader shift in sentiment away from the single currency.
European Political and Geopolitical Uncertainty Weighs on the Euro
Political instability across Europe continues to weigh on investor confidence, with France emerging as a particular source of concern. The French economy contracted by 0.1% in the third quarter, following stagnation in the previous three months, highlighting the challenges facing one of the eurozone's largest economies.
Mounting public debt, difficult budget negotiations and political fragmentation ahead of France's 2027 presidential election have added to uncertainty. Investors are increasingly scrutinising the country's fiscal outlook, with concerns over government borrowing and political stability placing pressure on French bond markets.
Beyond France, the ongoing war in Ukraine and disruption to global energy markets linked to the Middle East conflict present additional challenges. Elevated energy costs threaten business profitability and household spending across Europe, while geopolitical uncertainty continues to complicate the region's economic recovery.
Together, these pressures are creating an increasingly difficult backdrop for the euro.
UK Economic Resilience Adds to Sterling's Momentum
Sterling's advance has also been supported by encouraging domestic economic data. UK GDP expanded by 0.7% in the three months to August, with services growth helping demonstrate greater resilience than many economists had anticipated.
Combined with relatively supportive interest-rate differentials and a more settled fiscal outlook following the Budget, these developments have strengthened the case for sterling.
However, the outlook is not without risks. Elevated inflation, higher energy costs and the prospect of slower growth remain challenges for the UK economy. With the Bank of England's next interest-rate decision approaching, expectations surrounding monetary policy will remain an important influence on the pound.
What Next for GBP/EUR? Is Now the Time to Buy Euros?
The breakthrough above €1.20 represents an important psychological milestone, but the question now is whether sterling can sustain its momentum or extend its gains further.
From a technical perspective, initial resistance sits around €1.2030–€1.2050. If sterling can establish a sustained foothold above €1.20, this could open the door to further appreciation towards €1.2100–€1.2150. Such a move would reinforce the broader upward trend and potentially attract further buying interest.
However, €1.20 remains a crucial turning point. A failure to sustain the breakthrough could encourage profit-taking, with an initial pullback towards €1.1950–€1.1900 possible. A deeper correction could bring the €1.1850 region back into focus, particularly if economic data or central-bank expectations shift against sterling.
For UK businesses purchasing euros, the stronger pound presents an opportunity to achieve greater value from international payments. However, currency markets can change direction quickly, and the combination of central-bank decisions, economic data and geopolitical developments means further volatility remains possible.
Businesses with upcoming euro requirements may therefore wish to consider whether current market levels offer an opportunity to secure exchange rates rather than relying on further sterling appreciation.
Sterling has rallied to its strongest level in 19 months, but how much further can it go? If you're considering buying euros, speak to Monfor today to explore your options and make the most of the pound's recent strength.