Why Is the Pound Falling Against the Euro? The EUR/GBP Exchange Rate Reflects a More Complex Economic Reality

Societe Generale analysts have identified a key dynamic in the currency markets: the recent weakening of the GBP/EUR exchange rate is not coincidental but the result of corrections in market expectations. During the first months of 2026, there is a frequently overlooked narrative about how incorrect forecasts create distortions in currency valuation. The market made a significant misjudgment by projecting deep cuts in the Bank of England’s interest rates, leading to excessive pessimism about the UK economy. Now, as these projections are being corrected, the GBP/EUR exchange rate is adjusting accordingly.

The Market Underestimated the UK’s Economic Strength

The root of the problem lies in how UK economic indicators were interpreted. According to analyses from sources like Jin10, market participants incorrectly anticipated that the Bank of England would need to implement much more aggressive rate cuts than ultimately occurred. This overly negative assessment generated unwarranted distrust in the British currency. However, subsequent data and the UK’s actual economic behavior have shown that the situation was not as critical as initially assumed. As these perception corrections solidify, the pound has lost the “discount” factor that the market had applied, altering the EUR/GBP exchange rate.

Growth Convergence: The Key Driver of the Exchange Rate

The second variable at play is the behavior of growth expectations in both regions. Societe Generale’s analyses highlight that growth prospects in the eurozone are gaining relative ground compared to the UK. Historically, the EUR/GBP exchange rate has maintained a clear correlation with this difference in expected growth rates: when higher growth is anticipated in the eurozone, the euro tends to strengthen against the pound. This fundamental macroeconomic principle is now driving downward pressure on the GBP/EUR exchange rate observed in markets.

Implications: Beyond the Numbers

What’s significant about this analysis is that the EUR/GBP exchange rate does not respond solely to technical factors or speculative sentiment but to underlying macroeconomic realities. The correction experienced by the pound reflects a more accurate reassessment of the economic fundamentals of both economies. Operators who understand this mechanism will be better positioned to anticipate future movements in the euro-pound exchange rate.