British Pound to Euro Forecast: Yield Spreads Favour EUR Upside

Modified: Monday, 2 March 2026 08:01 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: Yield Spreads Favour EUR Upside

The Pound to Euro exchange rate (GBP/EUR) has slipped back toward two-month lows near 1.14 as political risks intensify following Labour’s heavy by-election defeat and markets continue to price further Bank of England rate cuts.

While Governor Bailey’s suggestion that March’s decision remains “open” offered brief relief, renewed leadership pressure on Prime Minister Starmer and narrowing UK-Eurozone yield spreads are reinforcing downside risks for Sterling.

GBP/EUR Forecasts: Political risks intensify

Citi FX forecasts that the Pound to Euro (GBP/EUR) exchange rate will slide to 1.11 by the end of 2026. According to the bank; “We maintain our forecasts for GBP underperformance over the medium-term.”

It does, however, see a recovery to 1.15 by the end of next year.

GBP/EUR recovered some ground in mid-week after Bank of England Governor Bailey stated that the March interest rate decision was still open.

There were, however, renewed losses to 2-month lows at 1.14 late in the week amid fresh pressure on Prime Minister Starmer after a convincing by-election defeat.

SocGen discussed the technical EUR/GBP outlook; "Although it briefly dipped below the 200‑DMA, the swift recovery above this MA signals a lack of sustained downside momentum."

It added; "Defence of the 200‑DMA near 0.8670 could lead to continuation in up move." It sees scope for gains to 1.1330.

ING expects near-term Pound losses to at least 1.1360 due to multiple factors; “We have been bullish on EUR/GBP on the back of concentration risks on GBP: from political noise, to some fiscal risks (albeit small) ahead of next week’s budget announcement, and dovish risks for Bank of England pricing.”

The Labour Party lost the Gorton and Denton by-election with a convincing win for the Green Party while Reform UK came second.

Mark Dowdin of RBC BlueBay Asset Management, commented; “In the UK, the Labour Party suffered a humiliating defeat at the Gorton by-election. This outcome was largely expected, but the margin of defeat continues to heap pressure on Prime Minister Starmer.”

There has not, however, been a negative impact from equities and gilts. The FTSE 100 index is trading at record highs while there has been a further small decline in the 10-year bond yield.

Dowdin added; “Nevertheless, gilts have continued their recent outperformance, helped by an improving inflation narrative, which may also, in turn, benefit the outlook for UK government finances.”

Citi also notes political risks for the Pound, but expects economics will be the key influence; “Citi Economics expects the BoE easing cycle to accelerate over H2 2026, forecasting a terminal rate of 3% vs market pricing around 3.2%. This is underpinned by disinflationary one-offs from the budget hitting the economy and a weak outlook for UK consumption and growth more broadly.”

Nomura also expects lower yields will sap Pound support; “the overall trajectory of services inflation still seems to support ongoing monetary policy convergence with the euro area. A further narrowing in front-end rates spreads would be positive for higher EUR/GBP.” (GBP/EUR losses)

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TAGS: Pound Euro Forecasts