British Pound to Euro Forecast: Gilt Yields and Spending Plans Weigh on GBP

Modified: Wednesday, 22 July 2026 20:11 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: Gilt Yields and Spending Plans Weigh on GBP

he Pound to Euro exchange rate (GBP/EUR) has fallen back towards 1.1720-1.1730, extending its retreat from recent 13-month highs as investors remain cautious over the UK's fiscal outlook. While softer labour-market data reinforced expectations that the Bank of England will keep interest rates on hold, concerns over government spending plans and elevated gilt yields have continued to weigh on Sterling.

GBP/EUR Forecasts: Retreat to One-Week Lows

The Pound to Euro (GBP/EUR) exchange rate remained under pressure on Wednesday, retreating to one-week lows as markets continued to assess the new government’s fiscal plans.

GBP/EUR traded near 1.1720 during the evening session, extending its retreat from last week’s 13-month highs above 1.1820.

The next important support level is around 1.1700, with a break below this area potentially bringing 1.1670 into focus.

Sterling has been hampered by renewed fiscal reservations, with investors wary of the underlying pressures facing the government and calls for further action to ease the cost-of-living squeeze.

Confidence in UK government bonds also remained fragile. The 10-year gilt yield initially retreated towards 5.00% from Monday’s highs around 5.05%, but subsequently moved back towards 5.05%, while the yield curve steepened.

Prime Minister Andy Burnham announced that VAT will be removed from domestic electricity bills from October 1.

The government said the measure would be funded during the current financial year by cancelling the Digital ID programme. Questions have nevertheless been raised over the funding arrangement, with critics claiming that parts of the abandoned programme had not been fully funded.

ING commented; “Attention this morning will be on the bond market response to yesterday's post-market surprise appointment of John Healey as Chancellor of the Exchequer. Stabilisation in the bond market is needed for the pound to fully regain its strong momentum.”

MUFG commented on Healey’s appointment; “He is viewed as being on the moderate or centre-left wing of the Labour party helping to ease concerns over the risk of a much looser fiscal policy.”

The bank added that uncertainty persisted because Healey had previously pushed for a faster increase in UK defence spending, potentially adding to pressure on the public finances.

There was some relief from the latest government borrowing figures, with public-sector net borrowing falling to £16.0bn in June from £23.9bn a year earlier.

The improvement primarily reflected lower inflation-linked debt-interest costs, with June borrowing also coming in £0.3bn below the Office for Budget Responsibility’s forecast.

For the first three months of the 2026/27 financial year, borrowing declined to £57.6bn from £61.3bn during the same period last year.

The cumulative deficit was nevertheless £2.7bn above the OBR forecast, maintaining concerns over the limited room available to fund further government initiatives.

The latest labour-market data also pointed to a gradual loss of momentum in the UK economy.

The unemployment rate held at 4.9% in the three months to May, in line with consensus forecasts.

The Office for National Statistics estimated that the number of payrolled employees declined by 4,000 in June compared with May, while vacancies fell again.

Annual regular earnings growth excluding bonuses slowed to 4.3% from 4.4%, although there remained a notable divergence between the public and private sectors.

ING commented; “Private sector is experiencing wage growth below 3%. That’s down from 6% just 18 months ago and is below the level that the Bank of England thinks is consistent with achieving a 2% inflation target over the medium-term.”

It added; “This is a key factor in our call for the Bank of England to keep rates on hold this year, unless things get materially worse in the energy market.”

The softer wage data should ease underlying inflation concerns, but the Pound is likely to remain sensitive to movements in gilt yields and further details of the government’s spending plans.

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TAGS: Pound Euro Forecasts