British Pound to Euro Forecast: Surprise Chancellor Choice Knocks GBP Lower

Modified: Tuesday, 21 July 2026 21:36 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: Surprise Chancellor Choice Knocks GBP Lower

The Pound to Euro exchange rate (GBP/EUR) has eased back to around 1.1735 after investors reassessed the UK's political outlook following Prime Minister Andy Burnham's surprise appointment of John Healey as Chancellor.

While Sterling initially rallied, concerns over the government's fiscal plans and rising gilt yields have prompted some profit-taking, allowing the Euro to recover.

GBP/EUR Forecasts: Pound Slips on Surprise Chancellor Appointment

The Pound to Euro (GBP/EUR) exchange rate secured net gains to 1.1780 in European trading on Monday with a firm Pound tone while the Euro was on the defensive.

There was, however, a retreat to near 1.1750 towards the European close as new Prime Minister Burnham appointed John Healey as Chancellor rather than Miliband or Mahmood who were the favourites to take the job.

Burnham also repeated that he would use all the flexibility in fiscal rules which caused some unease.

The 10-year gilt yield moved above 5.00% with significant selling during the day on domestic and global pressures.

MUFG commented on Sterling; “While we understand the reasons for the out-performance of the pound, we see numerous reasons for caution.”

According to ING; “we think a larger part of sterling's strength owes to stale short sterling positioning, and we suspect some large M&A flows going through, where cheaper valuations have made UK equities an attractive proposition this year.”

It added; “While we do not rule out a little further sterling strength during the Burnham honeymoon period, the UK's tight fiscal situation suggests a new cabinet will have to turn to tax increases if it wants to build out its plans to improve areas such as social care.”

ING expects GBP/EUR will be capped on any gains to near 1.19 with medium-term losses.

Fiscal policy will inevitably be a key short-term focus, especially after the Healey appointment.

Allianz Global Investors lead portfolio manager Ranjiv Mann commented; "It’s going to be very difficult for (Burnham) to move from that straitjacket because, as we've seen multiple times now over the last few years, bond investors in the UK will certainly punish the UK government if they don't stick to those rules."

Rabobank noted the poor growth performance; “This leaves Burnham facing a dilemma that has trapped much of British politics over the past decade. He inherits high public debt, elevated borrowing costs and weak growth, while demands on the state continue to rise from defence, net-zero and an ageing population. At the same time, investors are increasingly reluctant to finance ever-higher levels of current spending, fearing persistent inflation."

Bank of England (BoE) expectations will also be a key underlying element for the Pound.

MUFG commented; “There are now two 25bp rate hikes priced by March next year and if this escalation by into conflict in the Middle East is short-lived we doubt the BoE will hike given the recent favourable inflation backdrop. That should see yields move lower at a time when fiscal risks will persist, leaving GBP vulnerable to the downside.”

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TAGS: Pound Euro Forecasts