British Pound to Euro Forecast: UK Tax Speculation Weighs on Sterling Outlook

Modified: Friday, 3 October 2025 10:15 BST - Written by Tim Boyer

STORY LINK British Pound to Euro Forecast: UK Tax Speculation Weighs on Sterling Outlook

The Pound to Euro (GBP/EUR) exchange rate remains capped below 1.1500 as MUFG warns of a slide to 1.11 by mid-2026. ING sees the euro as slightly overvalued in the near term, but cautions that markets are already pricing in a GBP risk premium ahead of November’s tax-heavy budget.

Window for Pound Gains Closing? GBP/EUR Retreats from 2-Week Highs

The Pound to Euro (GBP/EUR) exchange rate briefly traded above 1.1500 on Wednesday before a retreat to 1.1485 as Pound resistance levels held.

The FTSE 100 index has posted a fresh record high on Thursday which has helped underpin the Pound to some extent, but there are fears that benign global conditions will not be sustained while there are also fears that domestic fundamental vulnerability will erupt again and trigger Pound selling.

MUFG forecasts a GBP/EUR slide to 1.11 by the second quarter of 2026.

On a short-term view, ING considers that the Euro is trading slightly above fair value; “Our model has recorded two consecutive weeks of around 1% short-term overvaluation in EUR/GBP, which may well be a signal of markets starting to price in some GBP risk premium ahead of the UK budget.”

There are strong expectations that the government will increase taxes, especially as it is also expected to announce higher welfare spending by abolishing the two-children benefit cap.

There will continue to be underlying speculation over which taxes will be targeted and there is also scope for media briefing by the government.

ING added; “While the announcement is only on 26 November, it’s widely expected that many bits of the budget will be released to the media in the weeks before.”

According to MUFG; “The constant media reports of tax hikes to come is weighing on sentiment and likely deterring business and household decision-making. The advance PMI data in September certainly pointed to a notable slowdown that could extend further into the budget and possibly beyond.

The UK bond market is relatively stable at this stage with the 10-year yield at 4.70% and the 30-year yield just above 5.50%.

There are, however, still reservations surrounding the UK fundamentals with the risk of fresh selling in gilts.

MUFG added; “whatever the outcome, key for the GBP will be that steps are credible with headroom in order to protect against another unforeseen rise in yields.”

The ONS reported that the UK net international investment liability position widening to £341.8 billion in the second quarter of 2025 from £324.4 billion in the first quarter.

Monex commented; "Investors appeared willing to look past these figures, given the overriding U.S. narrative. We, however, remain cautious."

It added; "Sterling rallies are likely to be capped by domestic headwinds and a Bank of England that we think should be inching toward further easing, especially after the November budget has been delivered."

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TAGS: Pound Euro Forecasts