British Pound to Euro Forecast: GBP Retreats on Starmer Leadership Risk

Modified: Saturday, 7 February 2026 08:31 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: GBP Retreats on Starmer Leadership Risk

The Pound to Euro exchange rate (GBP/EUR) has reversed sharply from recent highs as renewed UK political instability unsettles markets, overshadowing the Bank of England’s policy decision and reviving concerns over fiscal credibility and leadership risk.

Sterling’s slide reflects growing investor unease that domestic political fallout could reintroduce volatility just as markets were starting to price a steadier near-term outlook for UK rates.

GBP/EUR Forecasts: Slide From 5-Month Highs

The Pound strengthened to 5-month highs just above 1.1610 on Wednesday, but then corrected and was subjected to notable selling on Thursday with a slide to 1-week lows near 1.1525.

There has been an element of position adjustment ahead of the Bank of England (BoE) policy decision while the Pound has been damaged by renewed speculation over a formal challenge to Prime Minister Starmer and risks to political stability.

The UK bond market will be monitored closely during the day with any sell-off increasing Pound risks.

Starmer was put under intense pressure in the House of Commons on Wednesday as the fallout from the Mandelson affair continued to intensify.

Starmer admitted that the government was aware of on-going contact between Mandelson and Epstein after 2010 when he was appointed as UK ambassador to the US in 2024.

The government had pledged to release documents related to the appointment, but Labour MPs, led by former Deputy Leader Raynor, forced this release to be handled on a cross-party basis.

ING commented; “Some would argue that Angela Rayner effectively kicked off her leadership bid by calling for greater scrutiny of the vetting process used for last year’s appointment of Peter Mandelson as UK ambassador to the US.”

Given the scale of anger there has been a surge in speculation that Starmer will face a leadership challenge or be forced to resign.

This speculation has increased market unease over the risks of political instability and a shift in fiscal policy. If Starmer is forced out, there would be expectations that Chancellor Reeves would also be replaced.

It added; “The prospect of a change in both prime minister and chancellor remains one of the key threats to sterling this year, where a replacement of the PM by Rayner would mark a clear shift to the left and add further doubts to the UK fiscal position. A by-election later this month and local elections in May mean that it will be a noisy few months for UK politics.”

As far as the BoE is concerned, there are strong expectations that rates will be held at 3.75%. The vote split and statement will be watched closely.

Danske Bank commented; “Data published through January has come in on the hawkish side. Given a divided MPC, we will need more disinflationary signs before we get the final rate cut in April.”

The ECB is also expected to hold the deposit rate at 2.0% with rhetoric from President Lagarde watched closely after the decision.

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TAGS: Pound Euro Forecasts