Pound-to-Euro Forecast: GBP Pulls Back from 4-Week Best on Gilt Losses

Modified: Friday, 28 November 2025 10:31 BST - Written by Tim Boyer

STORY LINK Pound-to-Euro Forecast: GBP Pulls Back from 4-Week Best on Gilt Losses

The Pound-to-Euro exchange rate (GBP/EUR) retreated toward 1.14 after touching four-week highs, as short covering faded and gilt yields pushed higher.

Markets remain uneasy about the UK’s back-loaded fiscal tightening, limiting the Pound’s ability to extend recent gains.

With BoE cuts now almost fully priced for December, the outlook hinges on whether bond investors regain confidence.

GBP/EUR Forecasts: Retreats from 4-Week Highs

The Pound to Euro (GBP/EUR) exchange rate hit 4-week highs just above 1.1430 in Asian trading on Thursday before a retreat to near 1.14 in Europe.

Short covering after the budget faded and there were also losses in the bond market which hampered the Pound.

According to ING; “we expect EUR/GBP to meet demand in the 0.8700/8750 area and work its way back to 0.8850 ahead of a BoE rate cut on 18 December.”

The 10-year yield has increased to 4.47% from 4.42% at yesterday’s close.

Danske Bank noted the importance of bond markets; “The back-loaded nature of fiscal consolidation should keep Gilt investors attentive with a large part of the tightening delivered at the end of the forecast horizon.

Danske maintains a 12-month GBP/EUR target of 1.11.

Nomura, however, has closed its short GBP/EUR recommendation which had a target of 1.11.

ING commented; “The positives came in the form of higher fiscal headroom (less pressure on fiscal credibility) plus the fact that the UK government did not need to raise taxes as much as expected next year.”

Berenberg economist Andrew Wishart considered the political implications; “Taking the chance offered by a helpful official forecast to avoid hard decisions has increased the Chancellor’s and Prime Minister’s chance of political survival.”

He added; “The fall in yields and strengthening of the pound is probably more due to the waning of political risk rather than any changes to official forecasts or the policy package.”

ING still noted medium-term reservations; “Concerns over the credibility of back-loaded tax hikes may have to be left to another day. And we do not think the government’s spending plans, running into a 2029 election, look credible. Equally, we do not think sterling has to rally too far now, either.”

MUFG commented; “With no nasty surprises in today’s budget the initial market reaction has been one of relief with Gilt yields falling and the pound strengthening. That could persist for a period over the very short-term but with the budget offering no reason for any fundamental rethink of the fiscal risks ahead we see no reason to alter our FX and rates views.”

The bank is still backing GBP/EUR losses to 1.1240.

Markets remain very confident that the Bank of England (BoE) will cut interest rates next month.

Danske Bank commented; “The absence of VAT hikes paves the way for more near-term easing from the BoE, and markets are now pricing above 90% chance of an interest rate cut at the BoE December meeting.”

MUFG commented; “From a BoE perspective, we have expected the next cut in December for some time. We think that ultimately this Budget will be perceived as dovish by the BoE, and so another hurdle has been cleared on that path.”

Rabobank has shifted its forecast; “While fiscal consolidation is backloaded rather than frontloaded, markets have accepted it, and consequently we now incorporate a December cut into our forecast.”

The bank also noted that budget measures will have an impact in cutting headline inflation next year.

It added; “A lower print is a lower print and that will clearly help the majority of the MPC justify an extra rate cut to the public. We therefore now forecast a terminal rate of 3.25%, down 25bp from 3.50%.”

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TAGS: Pound Euro Forecasts