The pound's journey against the euro has taken a dramatic turn, with the GBP/EUR exchange rate experiencing its largest daily decline since November. This development has effectively erased the gains made in 2026, leaving strategists anticipating further losses.
A Troubling Trend Unveiled
The pair's failure to breach the 1.1560 mark and its subsequent turnaround have shifted the short-term outlook to bearish. This comes at a time when the UK labour market data continues to paint a concerning picture, with unemployment on the rise. However, the extent of the GBP/EUR decline cannot be solely attributed to domestic factors.
Geopolitical Tensions Take Center Stage
The decline in GBP/EUR appears closely tied to the selloff in stock markets, a response to escalating geopolitical tensions. Analysts at Reuters highlight that the move was influenced by stock losses, with the euro being a safer haven than the pound. This sentiment is echoed by strategists at Nomura, an investment bank, who remain sellers of the pound against the euro.
The 'Sell America' Theme Returns
But here's where it gets controversial...
US President Trump's recent actions towards Greenland have reignited the 'Sell America' theme, which could benefit the euro area as a viable alternative investment destination. The odds of a significant tariff escalation between the EU and the US have increased, with a 10% import tariff on European goods expected from February 01, rising to 25% in June.
Nomura's Dominic Bunning, Head of G10 Strategy, believes this intensification of tensions is likely to lead to a return to the 'Sell America' theme, which could have a positive impact on the euro area.
A Zero-Sum Game with Tariffs on the Rise
In this high-stakes game, there's little room for negotiation from a European perspective, making tariffs an increasingly likely outcome. Nomura targets a move in EUR/GBP to 0.8950, which translates to a pound-euro rate of 1.1173.
The trade is further supported by several fundamental factors, including the Eurozone's improving balance of payments data, positive equity inflows, a deteriorating UK labour market, and the potential for further Bank of England cuts.
And this is the part most people miss...
The impact of geopolitical tensions on currency markets can be profound, and the current situation highlights the intricate relationship between politics and economics. As we navigate these uncertain times, it's crucial to stay informed and consider the broader implications for global markets.
What are your thoughts on the potential outcomes of this situation? Do you agree with Nomura's analysis, or do you foresee a different path for the GBP/EUR exchange rate? Feel free to share your insights and predictions in the comments below!
