British Pound to Euro Forecast: GBP Dips as Starmer Leadership Under Pressure

Modified: Sunday, 10 May 2026 08:41 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: GBP Dips as Starmer Leadership Under Pressure

The Pound to Euro exchange rate edged lower on Friday as markets reacted to the first full wave of UK local election results, with heavy Labour losses increasing political uncertainty surrounding Prime Minister Keir Starmer.

Pound Sterling sentiment remained fragile against the Euro as investors assessed whether the scale of Labour’s setback could trigger renewed fiscal and leadership concerns within government circles.

The Euro also drew support from improving global risk appetite and reduced geopolitical tensions, while currency traders monitored whether the UK political fallout could inject a fresh political risk premium into Pound Sterling.

Analysts warned that GBP/EUR could remain vulnerable in the near term if concerns over Labour stability intensify following the weekend’s final election tallies.

Political developments dominated Sterling trading conditions after local election results showed Labour suffering substantial losses across England, Scotland and Wales, while Reform UK and the Green Party made major gains.

Markets are increasingly assessing whether the results weaken Prime Minister Starmer’s authority and complicate the government’s fiscal and economic agenda ahead of the next national election cycle.

ING warned that financial markets may still be underestimating UK political risks and maintained a cautious outlook for Sterling.

According to the bank; “The key point is that the pound and gilts are currently embedding no visible political risk premium. This leaves scope for potentially significant downside risks.”

The bank added that EUR/GBP still had room to strengthen further following the latest political developments.

BNY Mellon took a less negative stance on Sterling and argued that downside risks may be more limited than during the 2022 market turmoil.

According to the bank; “Even if fiscal loosening is the outcome, we don’t foresee an impact along the lines of the 2022 minibudget shock, and GBP’s downside may be more contained this time."

Labour Losses Increase Pressure on Starmer

The local elections attracted far greater market attention than usual amid growing questions over Starmer’s political standing.

MUFG noted that Labour was expected to suffer major losses and argued the elections had become an unofficial referendum on the Prime Minister’s leadership.

The bank commented; “These local elections may attract more market attention than usual given Prime Minister Keir Starmer’s precarious political position.”

Final results confirmed heavy Labour losses across traditional strongholds, while Reform UK secured major gains in English councils and the Greens also advanced sharply.

Reform UK reportedly gained over 1,400 council seats nationally, while Labour lost well over 1,000 seats in one of the party’s worst local election performances in decades.

Despite mounting criticism from some MPs and party figures, Starmer insisted he would remain in office and continue pursuing his policy agenda.

MUFG’s base case remains that Starmer survives politically, although with weakened authority and a possible cabinet reshuffle.

According to the bank; “In this scenario, Labour MPs prioritise leadership stability and there is no obvious successor able to command sufficient support within the party.”

Markets Watching Fiscal Risks and Leadership Speculation

Currency markets are also monitoring whether Labour shifts towards a more left-leaning economic direction following the election setback.

ING warned that particularly strong Green Party gains could increase speculation over fiscal policy risks and government spending pressures.

According to ING; “Such an outcome could fuel speculation that Labour may shift towards a more left-leaning leadership, potentially reviving concerns around fiscal sustainability.”

MUFG also warned that Sterling and UK bonds could come under heavier pressure if political instability increases further.

The bank added; “Gilt yields and GBP would likely react more negatively if heightened political uncertainty were accompanied by increased fiscal risks.”

Bank of America maintained that markets had previously taken a relatively relaxed stance towards the elections, but suggested political risks may have been underpriced.

Near-Term GBP/EUR Forecast

Near-term Pound to Euro direction is likely to remain heavily influenced by political developments and investor confidence in UK fiscal stability.

ING continues to target a retreat towards the 1.15 area for GBP/EUR, particularly if investors begin demanding a larger political risk premium for UK assets.

At the same time, analysts noted that the Euro has benefited from improving global sentiment and easing geopolitical tensions, providing additional support to EUR exchange rates against Sterling.

Currency traders will continue monitoring Labour’s internal response over the weekend alongside any signs of policy shifts or cabinet changes from Downing Street.

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TAGS: Pound Euro Forecasts