British Pound to Euro Forecast: GBP Retreats as Risks Build

Modified: Wednesday, 6 May 2026 14:36 BST - Written by Frank Davies

STORY LINK British Pound to Euro Forecast: GBP Retreats as Risks Build

The Pound to Euro exchange rate (GBP/EUR) has retreated from 8-month highs above 1.16, slipping back toward 1.1585 as markets grapple with renewed geopolitical tensions and mounting UK political uncertainty.

Sterling remains supported by elevated UK yields and expectations for further Bank of England tightening, but volatility in energy prices and concerns surrounding this week’s local elections are keeping traders cautious.

GBP/EUR Forecasts: Retreats from 8-Month Highs

The Pound to Euro (GBP/EUR) exchange rate tested 8-month highs above 1.16 late last week before a limited correction. GBP/EUR dipped to near 1.1560 on Monday amid a fresh slide in risk appetite before settling around 1.1585.

Political risk and energy prices will be key short-term elements for equities and the Pound with markets also monitoring economic impacts in the UK and Euro-Zone.

MUFG expects a GBP/EUR retreat to 1.13 by the end of 2026.

The UK 10-year yield is trading just above the 5.00% level while markets are pricing in three Bank of England rate hikes this year.

MUFG expects a Pound retreat; “Yields have played a role in providing the pound with support, but political instability and fiscal risks could well begin to de-stabilise the Gilt market once again and result in the pound losing its support from higher yields. We see scope for the pound to underperform the euro as the US dollar weakens more broadly.”

There has been very choppy trading across energy prices with crude jumping after reports that Iran had fired missiles against a US navy vessel before retreating as reports were denied.

There is still a high degree of uncertainty over the Iran conflict and economic impact.

Rabobank commented; “We have maintained the view that markets are sorely underestimating the impact that the war in Iran will have on global economies and financial markets, and that one day there would come a reckoning. While markets are still highly volatile and the situation in the Middle East highly uncertain, yesterday’s price action suggested that some traders are getting a reality check.”

There are no major UK data releases during the week, but markets will continue to monitor comments from Bank of England officials.

Political developments will be important with local elections on Thursday. There is the potential for position adjustment into the elections, especially with expectations of heavy losses for the Labour Party which would increase pressure on Prime Minister Starmer.

Elsewhere, markets remain confident that the ECB will increase interest rates at the next policy meeting which will underpin the Euro.

Nordea commented after last week’s policy decision; “The ECB kept rates unchanged, but a hike had been debated and unless there is a clear easing in high energy prices or a notable deterioration in the growth outlook, a rate hike in June looks likely. We continue to see a June hike and more later on.”

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TAGS: Pound Euro Forecasts