Pound-to-Euro Forecast: GBP/EUR Dips on Rising Yields, BoE Caution

Modified: Wednesday, 3 December 2025 09:31 BST - Written by James Fuller

STORY LINK Pound-to-Euro Forecast: GBP/EUR Dips on Rising Yields, BoE Caution

The Pound to Euro exchange rate (GBP/EUR) edged down to 1.1365 as Governor Bailey’s warning over global financial vulnerabilities added to existing fiscal and geopolitical concerns.

Rising UK yields and doubts over long-term tax and spending plans continue to limit Sterling’s momentum.

Markets now look to Ukraine developments and BoE rate-cut expectations to determine whether pressure persists.

GBP/EUR Forecasts: Held Below 1.14

The Pound to Euro rate was unable to regain momentum and edged lower to 1.1365 on Tuesday.

UK equity markets are little changed while the 10-year yield has edged higher to 4.50%.

The Pound will be vulnerable if confidence in the UK fiscal position deteriorates and UK yields move higher while global risks will also be in focus amid unease over AI investment.

Presenting the Financial Stability Report, Bank of England Governor Bailey warned over potential global financial risks and commented; “Key sources of risk include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets, which could stack to amplify the risk of these risks crystalising.”

He added that as governments may have less capacity to respond to shocks in the future given underlying spending pressures.

Developments surrounding the Ukraine between US and Russian representatives in Moscow will be watched closely.

ING commented; “Developments in the Russia-Ukraine peace talks remain the most relevant topic for the euro this week. As US Special Envoy Steve Witkoff meets with President Putin today, we should gain a clearer sense of how close we are to any agreement.”

Progress could offer some Euro support through lower energy prices while a negative readout would tend to hamper the Euro.

Fiscal policy will continue to be a key element even though the immediate frenzy surrounding the budget has faded.

OBR head Hughes resigned overnight following the early release of budget documents.

The appointment of his successor will be watched closely with markets wary over any move to undermine OBR independence.

MUFG noted initial relief; “There was initial relief that the UK Budget did not contain any nasty surprises to destabilize the gilt market, and that the government took the opportunity to raise fiscal headroom to just above GBP20 billion.”

It added; “However, there are still doubts over the government’s tax and spend strategy given the planned tax hikes are back-loaded to kick in around the timing of the next election while spending is more front-loaded.”

As far as monetary policy is concerned, there are strong expectations that the Bank of England (BoE) will cut rates this month.

MUFG commented; “We still expect the BoE to resume rate cuts this month encouraged by labour market weakness including slowing wage growth, and recent evidence of softer inflation, which is likely to be sufficient to encourage Governor Bailey to vote for a cut.”

The headline Euro-Zone CPI inflation rate edged higher to 2.2% for November and slightly above consensus forecasts of an unchanged rate of 2.1%. The core rate met expectations with an unchanged rate of 2.4%. Markets expect no short-term ECB move on rates.

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TAGS: Pound Euro Forecasts