British Pound-to-Euro Forecast: Gilt Yield Surge Threatens 1.16

Modified: Thursday, 3 September 2026 22:01 BST - Written by Frank Davies

STORY LINK British Pound-to-Euro Forecast: Gilt Yield Surge Threatens 1.16

The Pound to Euro exchange rate (GBP/EUR) remained close to two-month lows around 1.1650 as this week's surge in UK government borrowing costs intensified concerns over the fiscal outlook.

Gilt yields have retreated from their 2007 highs, providing Sterling with some relief, but elevated energy prices and growing expectations of further Bank of England tightening leave the Pound facing a difficult combination of fiscal and economic risks.

GBP/EUR Forecasts: Near Two-Month Lows

The Pound to Euro (GBP/EUR) exchange rate remained under pressure on Thursday after this week's surge in UK bond yields intensified concerns over the government's fiscal position.

GBP/EUR traded close to the 1.1650 area after testing fresh two-month lows, although Sterling stabilised as the worst of the global bond sell-off eased.

A sustained break below 1.1650 would leave the pair vulnerable to a deeper retreat towards 1.1600.

Rabobank maintains a three-month GBP/EUR target of 1.15.

Bond-market stresses and elevated energy prices have dominated trading this week, with investors questioning whether Sterling could be treated more harshly than other currencies because of the UK's underlying fiscal and debt vulnerabilities.

The UK 10-year gilt yield surged to 5.294% on Wednesday, its highest level since August 2007, before retreating towards 5.13% on Thursday as global bond markets stabilised.

Prime Minister Andy Burnham also attempted to reassure investors that the government would continue to adhere to its fiscal rules.

IG chief market analyst Chris Beauchamp commented; “The market rout stepped up a gear yesterday and shows no sign of stopping. Governments around the world are feeling the pressure from bond markets, but the situation is particularly acute for the UK, where Andy Burnham’s grand promises about reforming the economy are about to meet the cold reality of high debt levels and rocketing borrowing costs.”

He added; “UK taxpayers face the likelihood of paying more for his grand ambitions, while also having to worry about a BoE rate hike that becomes more likely with each $1 on the price of oil.”

The rise in borrowing costs has important implications for Chancellor John Healey ahead of the October 28 Budget.

Higher gilt yields increase the cost of servicing government debt and risk eroding the fiscal headroom available for new spending measures.

Deutsche Bank market strategist Jim Reid commented; “As meteorological autumn begun yesterday, a chill swept through markets as rising geopolitical risk, oil prices and bond yields created a risk off start to September.”

He added; “Rising bond yields push up a government’s borrowing costs – and risk eating into the new UK chancellor’s fiscal headroom, making it harder to afford new spending pledges in the upcoming budget.”

Rabobank also highlighted the delicate backdrop; “Investors are clearly anxious about governments with high debt and deficits, and this would not be a good moment for Chancellor Healey to draw attention to the UK’s fiscal strains.”

Current estimates suggest the recent increase in borrowing costs could materially reduce the Chancellor's fiscal buffer unless yields retreat before the Budget.

Energy Prices Keep BoE Tightening Risk Alive

Energy prices remain another important source of uncertainty.

Brent crude traded around $95 per barrel on Thursday after recent Middle East escalation pushed prices sharply higher.

The energy shock has increased concerns over another rise in inflation and strengthened expectations for additional Bank of England tightening.

Markets are now fully pricing two BoE rate increases by March, a significant shift from the more cautious expectations seen in August.

This provides some yield support for Sterling, but the effect is complicated by fears that higher rates will further increase government borrowing costs and weaken growth.

Handelsbanken senior UK economist Daniel Mahoney noted the risk that higher borrowing costs could ultimately require tax increases in the Budget.

He nevertheless remains relatively optimistic that gilt-market conditions could improve.

Mahoney commented; “If geopolitical risk recedes later this year, as we currently project, we do expect to see some easing of gilt yields in the future.”

He added; “Moreover, the spread between gilt yields and other G7 sovereign debt yields may end up narrowing next year as political risk rises up the agenda in continental Europe.”

For GBP/EUR, the 1.1650 area remains the immediate technical focus.

A decisive break below this level would increase the risk of a move towards 1.1600 and eventually Rabobank's 1.15 target.

A recovery above 1.1700 would ease the immediate pressure, but Sterling is likely to remain highly sensitive to gilt yields, energy prices and further signals over the government's Budget strategy.

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