British Pound to Euro Forecast: UK Fiscal Outlook Overshadows Softer Inflation

Modified: Thursday, 23 July 2026 22:25 BST - Written by David Woodsmith

STORY LINK British Pound to Euro Forecast: UK Fiscal Outlook Overshadows Softer Inflation

The Pound to Euro exchange rate (GBP/EUR) remains under pressure, trading around 1.1735 after retreating from last week's 13-month highs.

Investors continue to focus on the UK's fiscal outlook, with concerns over government spending plans and elevated gilt yields outweighing the positive impact of softer inflation data.

GBP/EUR Forecasts: Testing 1.17

Sterling remained under pressure on Thursday, with the Pound to Euro (GBP/EUR) exchange rate retreating towards the important 1.1700 level amid continued unease surrounding UK and global bond markets.

GBP/EUR traded around 1.1702 during the evening session, down 0.16% on the day and extending its retreat from last week’s 13-month highs above 1.1820.

A sustained break below 1.1700 would increase the risk of a further decline towards 1.1670.

The government’s fiscal stance remains a key element for the Pound, with investors scrutinising the cost and funding of Prime Minister Andy Burnham’s early policy announcements.

According to Rabobank; “Given the jittery reaction in gilts and the pound to Burnham’s early announcements, his honeymoon period could be short-lived.”

The bank expects GBP/EUR to retreat towards 1.1560 over a three-month horizon.

Following the decision to remove VAT from domestic electricity bills, Burnham announced that single bus fares outside London will be capped at £2 from January 2027.

The Prime Minister has since unveiled a 20% reduction in business rates for pubs, clubs and live music venues from April 2027.

Although the government has identified funding sources for the measures, markets remain concerned over whether the projected savings and additional revenue will be sufficient.

The UK bond market remained fragile, with the 10-year gilt yield trading around 5.05% as upward pressure on global borrowing costs compounded domestic fiscal concerns.

There are particular fears that the UK could be vulnerable to a sustained global bond sell-off because of its reliance on overseas capital.

Rabobank commented; “The UK has a low savings ratio and a large current account deficit. These metrics can increase the sensitivities of its debt market to perceived bad news.”

It added; “The UK may not have the largest debt/GDP ratio in the developed world, but arguably it has one of the most sensitive debt markets.”

According to Commerzbank’s Thu Lan Nguyen; “At the very least, Burnham’s promise of a ‘new economic model’ for the UK does not suggest that he will shy away from major measures.”

She added; “This, in turn, entails considerable risks for an already fragile market sentiment. Pound investors may face a volatile period.”

The latest UK inflation data provided an element of reassurance, although the softer figures failed to offset concerns surrounding fiscal policy and the gilt market.

Headline consumer-price inflation declined to 2.6% in June from 2.8% previously, slightly below consensus forecasts of 2.7%.

Core inflation held at 2.6%, compared with expectations for a marginal decline to 2.5%.

Goods inflation slowed to 1.7% from 2.0%, while services inflation eased to 3.6% from 3.7%.

ONS chief economist Grant Fitzner commented; “Food prices fell this month, driven by products including chocolate, margarine and beef. Clothing prices also fell with the start of summer sales, with bigger discounts than last year.”

According to ING; “We calculate the BoE's preferred ‘core services’ metric excluding volatile and indexed categories, that fell more sharply than overall services inflation – from 3.8% to 3.6%.”

The bank added; “The trend looks good, and together with low private-sector wage growth, suggests domestically-generated inflation is benign right now.”

ING stated that lower food and services inflation would be welcomed by Bank of England policymakers concerned about another persistent period of price pressures.

Although inflation is expected to rise towards 3.5% later this year, the bank expects the Bank of England to leave interest rates unchanged throughout 2026.

For the Pound, however, domestic inflation developments have temporarily been overshadowed by the government’s fiscal announcements and the response in the gilt market.

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TAGS: Pound Euro Forecasts