Pound-to-Euro Forecast: Analysts Warn of GBP Retreat Toward 1.12

Modified: Wednesday, 3 September 2025 09:34 BST - Written by Tim Boyer

STORY LINK Pound-to-Euro Forecast: Analysts Warn of GBP Retreat Toward 1.12

The Pound to Euro (GBP/EUR) fell to fresh 3-week lows under 1.15 as UK bond markets buckled, fuelling fears of a fiscal “doom loop” for the British economy.

The Pound Sterling outlook has come under intense pressure, with surging gilt yields, political jitters in Westminster, and fragile investor confidence clouding the outlook ahead of the Autumn budget.

Forecasts now point to further GBP/EUR exchange rate weakness, with MUFG projecting a retreat to 1.1235 by mid-2026, while analysts warn fiscal risks and high yields will remain a headwind for the Pound against both the Euro and the Dollar.

GBP/EUR Forecasts - Sharply Lower

The Pound to Euro (GBP/EUR) exchange rate dipped sharply to 3-week lows below 1.15 before edging back to just above this level in volatile markets.

A slide in UK bond markets has been the major catalyst with the 10-year yield at 4-month highs around 4.80% while the 30-year yield has hit a 27-year high just below 5.70%.

MUFG commented; “There are growing concerns of the government being trapped in a fiscal-doom loop of weaker than expected growth and higher than expected yields forcing the government to increase taxes, in turn weighing further on growth. How to break out of this cycle is unclear.”

The bank expects GBP/EUR will retreat to 1.1235 by the second quarter of 2026.

Equity markets have also been under pressure which has hampered the UK currency.

The slide in bond yields is not just a UK phenomenon with US and Euro-Zone markets also sliding.

The German 30-year yield has hit a 14-year high with the French 30-year yield at a 16-year high.

The slide in French bonds is liable to hamper the Euro.

Nevertheless, the Pound has taken significant punishment with markets notably concerned over the UK outlook.

On Monday, Prime Minister Starmer appointed the UK Chief Secretary to the Treasury Jones as his personal chief secretary which triggered some fears that Chancellor Reeves position was being undermined.

According to XTB research director Kathleen Brooks; “There could also be some concern that Chancellor Rachel Reeves is being ‘managed out’.

Saxo Markets UK investor strategist Neil Wilson commented; “The market move was a sign that investors do not have confidence the Treasury will stick to its strict borrowing rules. 30yr yields at their highest in almost three decades is not a good look for the Labour government, and underscores that there is little fiscal or economic credibility left.”

Jane Foley, head of FX strategy at Rabobank commented; "While a repricing of Bank of England expectations had helped sterling last month, the UK is going to be venerable to fiscal risks as the Autumn budget approaches, which is likely to remain a headwind for sterling."

The headline Euro-Zone inflation data increased to 2.1% for August from 2.0% previously and in line with consensus forecasts while the core rate held at 2.3% compared with expectations of a slight decline to 2.2%.

As far as Euro-Zone monetary policy is concerned, there were hawkish comments from ECB council member Schnabel. She commented; “monetary policy may be already mildly accommodative and therefore I do not see a reason for a further rate cut in the current situation.”

Although fellow member Simkus was more dovish and still considers that a December rate cut is possible MUFG commented; “While we are still sticking to our forecasts for further ECB easing in the year ahead, we do acknowledge that there is a higher hurdle to justify further easing given the ECB has already cut the policy rate in half.”

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TAGS: Pound Euro Forecasts