Pound-to-Euro Forecast: All Eyes on UK Bonds with Tax Storm Brewing

Modified: Wednesday, 22 October 2025 08:45 BST - Written by Tim Boyer

STORY LINK Pound-to-Euro Forecast: All Eyes on UK Bonds with Tax Storm Brewing

The Pound to Euro (GBP/EUR) exchange rate slumped to 1.14826 as markets digested the latest UK CPI data.

Rising deficit pressures have fuelled expectations of heavy tax increases in November’s budget, though sub-4.5% gilt yields have limited further Pound selling.

GBP/EUR Forecasts: 1.15 Handle

The latest UK borrowing data has reinforced fears over the underlying situation and probability of notable tax hikes, but the 10-year yield has been held below 4.50%, limiting potential Pound selling.

The Pound dynamics will shift if there is renewed upward pressure on yields.

Kathleen Brooks, research director at XTB, noted underlying pressures; “Overall, today’s public finance figures in the UK suggest that 1) there are deep set financial problems in the UK, and 2) the November budget is now virtually assured to be painful for all, without public sector spending consolidation.”

The UK government borrowing requirement widened to £20.2bn for September from £18.6bn the previous month and the largest September deficit since 2020.

For the first half of fiscal 2025.26, the deficit increased to £99.8bn from £88.3bn the previous year.

Debt-servicing costs increased to £9.7bn for the month from £5.8bn last year.

Capital Economics deputy chief UK economist Ruth Gregory noted that the deficit is already £7.2bn higher than the OBR projection.

She added; “It would now take a big turnaround over the remainder of the year to put borrowing in 2025/26 back on track to meet the OBR’s forecast.”

Capital Economics expects the Chancellor will need to raise £27bn to restore headroom.

The government could decide that a way to avoid tax hikes or spending cuts would be to relax fiscal rules, but this would be a high-risk strategy.

ING commented; “We think the biggest risk for UK bonds in the Autumn Budget is a change to fiscal rules. It’s the easiest way of avoiding raising tens of billions of pounds in extra taxes. And the rules are set to change next year anyway; rather than requiring a current budget surplus in 2029/30, the Treasury will be allowed to run a small 0.5%/GDP deficit.”

It added; “Bringing that forward to this autumn may sound innocuous, but it would likely go hand-in-hand with a material increase in borrowing next year, relative to prior forecasts. We think it would provoke a material rise in gilt yields.”

As far as the Euro-Zone is concerned, the EU council will be watched closely, especially with Ukraine President Zelensky due to attend on Tuesday.

A key topic will be the debate surrounding using frozen Russian assets to fund military assistance to Ukraine.

Commerzbank commented; “This move, which has gained increasing support, is controversial and legally risky. If executed, it could set a dangerous precedent for foreign investors, particularly those from nations with differing foreign policy agendas, and lead them to reconsider investing in Europe or even withdraw existing investments.”

It added; “In summary, this EU meeting has the potential to spark some life in EUR exchange rates again, which have been rather lethargic lately."

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TAGS: Pound Euro Forecasts