Pound to Euro Forecast: Labour Election Losses Spark Fresh GBP Uncertainty

Modified: Monday, 11 May 2026 07:01 BST - Written by David Woodsmith

STORY LINK Pound to Euro Forecast: Labour Election Losses Spark Fresh GBP Uncertainty

The Pound to Euro exchange rate (GBP/EUR) remained below the 1.16 level after heavy local election losses for the UK Labour Party intensified speculation surrounding Prime Minister Keir Starmer’s political future.

Sterling has so far remained relatively resilient near 1.1570, supported by elevated UK yields and expectations for further Bank of England tightening, although markets are increasingly focused on whether political instability could trigger renewed pressure on UK assets.

GBP/EUR Forecasts: Verdict on UK PM Starmer

MUFG forecasts that the Pound to Euro (GBP/EUR) exchange rate will weaken to 1.1240 by the first quarter of 2027.

UBS also sees near-term risks of a GBP/EUR slide to 1.1240, but expects a recovery to 1.1765 by the end of this year as major government policy changes are resisted.

According to UBS; “Ultimately, it comes down to whether fiscal policy is likely to change materially as a result of the election outcome if a successful leadership challenger seeks either to relax fiscal rules or implement market-unfriendly tax increases with which to finance higher government spending.”

GBP/EUR was unable to hold the 1.16 level during the week, but remained resilient with a limited retreat to 1.1570.

As expected, the Labour Party suffered heavy losses in local elections and Welsh elections with markets assessing the implications and whether Prime Minister Starmer will face a leadership challenge. Potential policy changes would also be crucial.

According to MUFG; “The risk of a leadership challenge is certainly growing and a move to remove Starmer over the summer ahead of the annual political party conference season is high. If this was to happen at a time of a further rise in crude oil prices, a renewed sell-off in the Gilt market could certainly begin to play a role in undermining pound performance.”

ING added; “Investors will be watching the cabinet closely for signs of pressure or even resignations, as markets weigh up the possibility of an increase in borrowing later this year under different leadership scenarios.”

SocGen expects Starmer will aim to adopt a pro-Europe stance; "In the UK, it’s Mayday for PM Keir Starmer and what looks like will be a devastating election defeat for the Labour Party could precipitate a leadership challenge. PM Starmer will reportedly count on reversing Brexit to save his premiership if the results go against him."

Bank of England expectations will also remain an important element.

MUFG commented; “Our prior view was that the BoE would hike once but following the April meeting we have added one further rate hike and now assume a 25bp hike in June and August taking the policy rate to 4.25%.”

High yields could continue to support the Pound, but there are risks if there is a loss of confidence in the bond market, especially if growth deteriorates.

The 10-year bond yield hit 18-year highs above 5.10% during the week before a retreat to around 4.90%, but remained much higher than before the US-Iran conflict.

Brown Brothers Harriman’s (BBH) commented; "Alarmingly, UK nominal GDP growth is tracking below 10-year gilt yields, making stopping debt growth very difficult which is a drag on GBP."

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts