Pound to Euro Forecast: Bond Yields Spike to 16-Year Highs, Risks Build

Modified: Monday, 23 March 2026 07:01 BST - Written by David Woodsmith

STORY LINK Pound to Euro Forecast: Bond Yields Spike to 16-Year Highs, Risks Build

The Pound to Euro exchange rate (GBP/EUR) slipped back toward 1.1525 after failing to break the key 1.16 resistance level, as surging energy prices and rising bond yields fuelled volatility across currency markets.

While higher UK yields initially supported Sterling, growing concerns over the economic impact of tighter financial conditions and persistent inflation risks are starting to weigh on the Pound’s outlook.

GBP/EUR Forecasts: Energy pressures ramp up

ING expects the Pound to Euro (GBP/EUR) exchange rate will hit resistance around 1.1630 and is still forecasting a slide to 1.11 on a 12-month view.

HSBC expects that GBP/EUR can hold around 1.1500 by the end of this year

The main feature during the week was a jump in UK and Euro yields. Following the Bank of England and ECB meetings, there was a spike in expectations that both banks would increase interest rates.

GBP/EUR was unable to break the 1.16 level and dipped sharply to 1.1525 on Friday amid the surge in rates. Talk over an April ECB April rate hike also supported the Euro.

The Bank of England held interest rates at 3.75%, in line with consensus forecasts. There was, however, a 9-0 vote for no change compared with expectations that two members would continue to back a cut at this meeting.

Importantly, the bank emphasised that it would be alert to the risk of second-round inflation effects from the surge in energy prices. In this context, there were comments that the bank would be prepared to hike rates if necessary.

There had already been a shift in market expectations, but the statement triggered another dramatic shift with traders pricing in at least two rate hikes and potentially three hikes by the end of 2026.

MUFG commented; “Bailey later warned about reaching strong conclusions, but the messaging today certainly suggests that officials are more worried about inflation risks (i.e. unanchored expectations) and less worried about recession risks than in 2022. That suggests a more proactive approach to raising rates if energy prices remain elevated.”

ING still expects rate cuts; “two BoE rate cuts, perhaps in the second half of the year, should be enough to send EUR/GBP to 0.88+.” (GBP/EUR losses to 1.1360)

There has also been a huge shift in market yields with the 10-year yield surging to 16-year highs near 5.00%. The 2-year yield also spiked over 70 basis points to around 4.56%.

Higher yields initially helped underpin the Pound, but there will also be growing unease over the impact on the economy.

The jump in energy prices will have a direct negative impact while higher market rates will also dampen activity as well as risking serious damage to bond-market confidence.

According to ING; “Sterling also faces challenges from the Gilt market and politics. 10-year Gilt yields are not far from the 4.90% levels that started to hit sterling in January.”

ING added; “UK Prime Minister Keir Starmer faces a variety of political threats over the coming months. A potential departure alongside Chancellor Rachel Reeves would hit GBP.”

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TAGS: Pound Euro Forecasts