Pound-to-Euro Week Ahead Forecast: GBP Battles to Hold 1.17

Modified: Monday, 27 July 2026 07:31 BST - Written by David Woodsmith

STORY LINK Pound-to-Euro Week Ahead Forecast: GBP Battles to Hold 1.17

The Pound to Euro exchange rate (GBP/EUR) starts the new week near 1.17, with UK fiscal concerns and fragile bond markets offsetting some relief from the sharp Monday decline in oil prices.

Pound Sterling was battling to hold the 1.1700 level on Monday morning as markets continued to assess the UK fiscal outlook and the implications of volatile energy prices.

GBP/EUR Forecasts: Bank of England Ahead

GBP/EUR traded around 1.1703 in early Europe, having found support close to 1.1700 late last week.

The pair has retreated from July’s 13-month high above 1.1820, with a break below 1.1700 potentially exposing 1.1670 and then 1.1600.

The European Central Bank’s decision to hold the deposit rate at 2.25% last Thursday was in line with expectations and had little lasting impact on the exchange rate.

According to MUFG; “The pound looks to have over-extended a move stronger and the risks ahead may mean we see a retracement.”

The bank sees scope for GBP/EUR losses towards 1.15.

A sharp increase in oil and gas prices dominated markets last week, fuelling inflation concerns and triggering renewed selling across global bond markets.

The Euro tends to be more vulnerable when European energy costs rise, while weaker equity markets usually create greater pressure on the risk-sensitive Pound.

Oil prices have fallen sharply at the beginning of the new week following a pause in attacks between the United States and Iran.

Brent crude retreated towards $92 per barrel on Monday morning after trading above $100 last week, while global bonds and equity markets recovered.

The decline in oil prices offers some near-term relief, but the Middle East situation remains highly uncertain and markets will remain sensitive to any renewed escalation.

Sustained energy costs near recent highs would add to inflation pressures in both the UK and Eurozone and could force central banks to maintain tighter monetary policy for longer.

The Bank of England will announce its latest interest-rate decision this week, with markets expecting Bank Rate to remain unchanged at 3.75%.

Expectations have shifted markedly following the increase in energy prices, with investors pricing the risk of several rate increases through the middle of 2027.

The Monetary Policy Committee’s assessment of the energy shock and its potential impact on inflation will therefore be watched closely.

ING is not convinced that the Bank of England will raise rates and commented; “An unchanged UK policy rate and one further European Central Bank hike to 2.50% is our house call over the next six to nine months.”

A divided Bank of England vote or warnings that higher energy prices could produce persistent inflation would support UK yields and potentially the Pound.

Sterling may struggle to benefit fully, however, if higher yields are interpreted as increasing the government’s debt-servicing burden rather than reflecting a stronger economic outlook.

The ECB held interest rates at last week’s meeting but acknowledged that the full inflationary impact of the energy shock had yet to emerge.

Markets still expect at least one further rate increase, although Monday’s decline in oil prices could reduce the urgency for a September move if it is sustained.

MUFG commented; “Another hike as soon as the following policy meeting in September is almost fully priced in.”

It added; “It fits with our own forecast for one final hike in September, although we acknowledge that the risk of an additional hike later this year is increasing if higher energy prices are sustained during the second half of this year.”

Eurozone growth and inflation figures will also be important this week, particularly for expectations surrounding the timing and scale of any further ECB tightening.

Evidence of stronger inflation or resilient Eurozone activity would increase support for the Euro and maintain pressure on GBP/EUR.

UK government bonds came under sustained pressure last week, with the 10-year gilt yield reaching 5.10%, its highest level for more than two months.

Yields eased slightly on Friday and could receive further support from Monday’s decline in oil prices, but confidence remains fragile.

Prime Minister Andy Burnham’s government has announced a series of measures designed to ease household and business costs, including cuts to electricity VAT and business rates.

Although funding sources have been identified, investors remain concerned over the limited fiscal headroom and the potential cost of further policy measures.

MUFG commented; “Just to regain the lost fiscal headroom requires GBP15bn worth of savings to close a roughly GBP10bn fiscal slippage and to increase defence spending by GBP5bn.”

Higher gilt yields would increase the cost of servicing government debt and could force Chancellor John Healey to identify additional savings or revenue measures.

The response of the gilt market is therefore likely to remain a crucial influence on Sterling during the week ahead.

Near-Term GBP/EUR Forecast: Weak UK Manufacturing Adds to Downside Risks

The latest UK industrial data also highlighted the uneven economic backdrop.

The CBI industrial orders balance was unchanged at -45 in July, compared with consensus forecasts for an improvement to -40.

CBI senior lead economist Ben Jones commented; “We’re seeing manufacturers being squeezed from both sides. Costs continue to climb while weak demand limits their ability to raise prices.”

The weak survey reinforces concerns that the UK economy could face a difficult combination of subdued demand, elevated energy costs and renewed inflation pressure.

For GBP/EUR, the 1.1700 level will be the immediate focus at the beginning of the week.

A recovery above 1.1760 would ease short-term downside pressure, while a sustained break below 1.1700 would put 1.1670 and 1.1600 back in focus.

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TAGS: Pound Euro Forecasts