– Written by


David Woodsmith

STORY LINK British Pound to Euro Forecast: GBP Nears Best Levels in Four Months

The Pound-to-Euro exchange rate (GBP/EUR) edged higher after traders absorbed stronger-than-expected UK GDP data, with Sterling finding support as immediate recession fears eased and risk appetite improved.

GBP/EUR Forecasts: Looking to Target 4-Month Highs

There was a muted initial response to the UK GDP data, but the Pound has gained some traction with the Pound to Euro (GBP/EUR) exchange rate edging above the 1.15750 level.

GBP/EUR needs to move above 1.1570 to reach a 4-month high.

There was stronger than expected GDP data while risk appetite was stronger amid immediate relief that there have been no US attacks on Iran.

ING sees scope for short-term Pound gains; “Given the positioning, we think EUR/GBP support at 0.8645/55 looks vulnerable and the risks are building towards a breakdown to 0.8600 next week (Gains to 1.1630 for GBP/EUR).

ING still expects Pound losses later in the year.

MUFG played down the GDP impact; “While the upside growth surprise is a welcome development, it does not significantly alter our expectations for further BoE cuts and a weaker pound this year.”

UK GDP increased 0.3% for November after a 0.1% decline the previous month and compared with consensus forecasts of a 0.1% advance for the month.

For November, the services sector grew 0.3% while there was a 1.1% gain for industrial production as Jaguar Land Rover output continued to rebound from the cyber attack.

There was, however, a 1.3% slide in construction output.

ING expressed concern over the construction sector; What really stands out in these figures, though, is what’s happening in construction. Output was down sharply (again) in November and is now almost 3% lower since July. That goes hand-in-hand with a purchasing managers index (PMI) which has recently fallen off a cliff.”

Wider economic fears will ease to some extent.

According to Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK; “The risk that the economy outright contracted in Q4 has sharply receded.”

He was still cautious over the outlook; “However, we doubt the economy did little more than stagnate in Q4, as the initial data for December has been weak, and doctor’s strikes will add to the drag on growth.”

There are potentially significant implications for monetary and fiscal policy

Pugh added; “The stronger-than-expected outturn in November will also further dent any chances of a back-to-back rate cut in February. We doubt the next rate cut will come until April.”

Markets see less than a 10% chance of a February rate cut.

National Institute of Economic and Social Research senior economist Ben Caswell noted; “Given today’s figure, we now project that the economy grew 1.4 per cent in 2025 – a rise in the growth rate compared to the year before.

He added; “Against this backdrop, the Chancellor more than doubled her fiscal headroom at the Budget in an effort to bolster economic confidence. While it is too early to see the full effect of this, the move appears to have eased speculation over future tax policy and the uncertainty that came with it.”

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– Written by


Tim Boyer

STORY LINK Euro to Dollar Forecast: Can EUR/USD Break Higher as Fed Risks Grow?

The Euro to Dollar exchange rate (EUR/USD) has eased back from recent highs, slipping toward 1.16 as investors grow more cautious on the timing and scale of Federal Reserve rate cuts.

While some banks still see scope for euro gains over the medium term, resilient US data and a firmer dollar tone have capped upside for now.

Markets are increasingly focused on Fed policy credibility and whether US rates can stay higher for longer into 2026.

EUR/USD Forecasts: Battle for Supremacy

RBC Capital Markets expects that the Euro to Dollar (EUR/USD) exchange rate will make gains in 2026, but has lowered its end-year projection to 1.20 from 1.24 with this level now seen as being reached at the end of 2024.

After little change initially, ING is continuing to back gains to 1.22 by the end of 2026 as US interest rates continue.

EUR/USD drifted lower to test the 1.1600 area during the week.

Markets are expecting two Fed rate cuts during 2026.

Credit Agricole is expecting Euro losses as the Fed resists rate cuts; “We continue to expect unchanged rates in January.

Past that, our current base case has the pause turning into an extended one that lasts through the entirety of 2026, though this is predicated upon seeing some stabilisation in the labour market in upcoming reports, where weaker-than-expected data would raise the risks of a shorter pause and/or more easing than we currently project.”

The issue of Fed independence will remain a key issue.

Early this week, the justice department issued subpoenas against the Federal Reserve and Chair Powell with claims of malpractice over Federal Reserve building renovations.

Powell pushed back strongly against the move and defended the bank strongly. MUFG commented;

“The repeated attacks on the Fed’s independence to satisfy President Trump’s desire for lower rates continues to pose downside risks for the US dollar and supports our forecast for a weaker US dollar.

It added; “However, it could backfire on President Trump if Fed officials dig in and keep rates on hold as an act of defiance to highlight the Fed’s ongoing independence in setting policy.”

RBC still expects net dollar losses against the Euro on three grounds as the cost of carry compresses between the countries, hedges on US assets will rise. It also expects a rotation into European assets and stronger Euro-Zone growth.

RBC is still cautious over the scope for substantial gains;

“We are aware of the headwinds to long-term EUR/USD strength – US productivity growth outperforms Europe’s, there is no good European alternative to USTs, the US dominates Europe in AI and tech and the EU also still has an undercurrent of political risk.”

ING also sees near-term potential barriers to Euro support;

“With volatility low, and high-yield and emerging market currencies in demand, it seems investors are preferring to fund carry trades out of the euro at a cost of just 2.00% rather than dollars at around 3.55%.”

Deutsche Bank expects Asian currency developments will be a key element;

“Comparing medium-term FX valuation estimates to mid-dated forwards shows that EUR/USD is now very close to fair value, even if the dollar is still expensive. It will be very hard for EUR/USD to break 1.20 in the absence of greater idiosyncratic strength in Asia FX.

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Reuters Poll Points to a July Rate Hike

According to January’s Reuters poll, conducted between January 6-13, 43% of economists predicted a July BoJ rate hike, 27% a June hike, and just 8% an April hike. Economists expect the BoJ to delay raising interest rates to assess the impact of December’s rate hike on the economy.

However, the weaker yen has pushed import prices higher, reducing households’ purchasing power. A more hawkish BoJ policy stance, including hints at cutting JGB purchases, would likely offer much-needed relief. Private consumption is a key contributor to Japan’s economy, accounting for roughly 60% of GDP.

The BoJ monetary policy decision is set for January 23. 65 of 67 economists polled expected the BoJ to keep rates steady in January and March. The slump in machinery orders supported the economists’ outlook. But, political developments and fiscal spending plans are likely to change the narrative, suggesting a USD/JPY pullback from current levels. Sentiment toward the BoJ’s rate path through H1 2026 will be key, given that most economists expect a rate hike in July.

The political uncertainty and fiscal concerns support a cautiously bullish short-term price outlook for USD/JPY. Meanwhile, warnings of yen interventions and expectations of Bank of Japan rate hikes reinforce the bearish medium-term projection. Hawkish BoJ rhetoric and intervention warnings would likely challenge the cautiously bullish short-term outlook.

China Adds Policy Uncertainty to the Policy and Economic Outlooks

Rising Japan-China tensions have added another layer of policy uncertainty into the mix. US tariffs and friction with China have led economists to predict slower growth and softer inflation in 2026.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero commented:

“All in all, Japan’s GDP is expected to slow to +0.9% in 2026 from +1.3% in 2025, dragged by higher US tariffs and tensions with China. […] With the Yen remaining relatively weak, inflation is expected to slow down only to +2.3% YoY in 2026 from +3.1% YoY in 2025.”

On the BoJ’s monetary policy stance, Alicia Garcia Herrero stated:

“With PM Takaichi’s strong preference for a lax monetary policy to realize her vision, the BoJ is likely to remain cautious in normalizing further. In fact, uncertainties are compounded by the political tension with China, raising the bar to hike. Nevertheless, the ongoing tug of war over policy normalization with the government is anticipated to keep the Yen stubbornly weak. These developments are expected to force the BoJ to hike by 25 bps, possibly in July, to stabilize the currency.”

The prospect of BoJ rate hikes and Fed rate cuts reinforces the bearish medium- to longer-term price trajectory.

US Trade Policy in Focus ahead of Key Economic Data

This week, investors should closely monitor developments on tariffs. A US Supreme Court ruling on the legality of the US administration’s tariff policies is imminent.

A court ruling that blocks tariffs would likely boost risk sentiment, easing demand for the US dollar. Furthermore, the removal of tariffs would improve global trade, benefiting Japanese exporters. These dynamics would likely overshadow the downward effect of removing tariffs on Japanese import prices and the yen, indicating a bearish USD/JPY outlook.

On Monday, US markets are closed for Martin Luther King Jr. Day, with the Fed in its Blackout Period, leaving the USD/JPY exposed to geopolitical risks. President Trump announced tariffs on eight European countries on Saturday, January 17, in a bid to acquire Greenland, potentially escalating trade tensions. The eight countries included Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland.

Despite rising geopolitical tensions, expectations of multiple BoJ rate hikes and a new Fed Chair favoring lower interest rates suggest narrower US-Japan rate differentials. These factors reaffirm the bearish medium-term outlook for USD/JPY.

Technical Outlook: Key Levels to Watch

For USD/JPY price trends, traders should assess technicals and closely track the fundamentals.

Viewing the daily chart, USD/JPY remains above its 50-day and 200-day Exponential Moving Averages (EMAs), signaling bullish momentum. While technicals remain bullish, bearish fundamentals are developing, countering the technicals.

A break below 157 would expose the 50-day EMA and the 155 support level. A sustained fall through the 50-day EMA would indicate a bearish near-term trend reversal, bringing the 200-day EMA into play. If breached, 150 would be the next key support level.

Crucially, a sustained fall through the 50-day and 200-day EMAs would reaffirm the bearish medium-term price outlook.