Pound to Euro Rate Tests Key Support as Gilt Yields Stay High

Modified: Sunday, 6 September 2026 23:01 BST - Written by James Fuller

STORY LINK Pound to Euro Rate Tests Key Support as Gilt Yields Stay High

Bond-Market Fears Keep Pound under Pressure, GBP/EUR Near Two-Month Lows

The Pound to Euro (GBP/EUR) exchange rate remained under pressure at the end of the week, with Sterling struggling to recover from two-month lows just above 1.1620.

The pair attempted to stabilise around the 1.1630-1.1650 area, but sentiment towards the Pound remained fragile as investors continued to monitor UK bond yields, fiscal risks and the outlook for Bank of England policy.

MUFG expects limited further GBP/EUR losses towards 1.1560 by the end of 2026.

UBS, however, maintains a constructive stance on the Pound; “We continue to view sterling positively, supported by improving confidence in UK assets, a more fiscally credible political backdrop, and the potential for investors to reduce still substantial short positions.”

UK data has offered some support and markets continue to price additional Bank of England tightening over the coming months.

However, the Pound has struggled to benefit fully from higher UK yields because the increase has also raised concerns over government debt-servicing costs and the fiscal outlook ahead of the October 28 Budget.

The UK 10-year gilt yield ended Friday close to 5.14%, having surged to 5.294% earlier in the week, its highest level since 2007. :contentReference[oaicite:1]{index=1}

ECB Rate Hike Expectations Support Euro

The Euro has received additional support from expectations that the European Central Bank will raise interest rates at its September meeting.

Eurozone inflation increased to 3.3% in August, well above the ECB's 2% target, with higher energy costs accounting for much of the renewed pressure.

Markets are fully pricing a 25-basis-point increase in the deposit rate to 2.50% on September 10.

A Reuters poll of economists also showed a strong consensus for a hike, although most expect the ECB to stop tightening after this move.

The contrast with the UK is important for GBP/EUR.

While markets still expect further Bank of England tightening, the domestic backdrop is complicated by weak labour-market data, elevated borrowing costs and concerns over the government's fiscal position.

Scotiabank considers confidence an important element; “We continue to highlight the importance of sentiment – specifically, politically-related sentiment – in driving the recent strength in the pound following the arrival of PM Burnham in late June.”

MUFG also noted that Sterling continues to outperform relative yield changes.

The bank commented that, based purely on Eurozone-UK two-year spreads, EUR/GBP should be substantially higher than current levels, equivalent to GBP/EUR nearer 1.1230-1.1360.

Sentiment and UK Growth Remain Crucial

The options market has also started to show renewed concern over Sterling downside risks.

Scotiabank commented; “The shift had been clearly observed in risk reversals as the options market had faded its premium for protection against downside risk. However the latest surge in oil prices appears to be eroding this key source of support, and riskies are once again pricing a higher premium for downside protection.”

Higher oil and gas prices remain particularly important because they increase inflation pressure while simultaneously threatening economic growth.

The latest UK services data was relatively encouraging.

The final S&P Global services PMI increased to 52.5 in August from 52.1 in July, its highest level since April, although below the flash estimate of 52.8. :contentReference[oaicite:2]{index=2}

Tim Moore, Economics Director at S&P Global Market Intelligence, commented; “August data highlighted improving operating conditions across the UK service economy.”

He added; “Service providers are increasingly optimistic about the year ahead business outlook, with confidence levels now close to those seen just prior to the Middle East conflict. However, business activity growth projections were still subdued in comparison to long-run trends.”

Markets are pricing two Bank of England rate increases over the next six months, although economists remain much less convinced that policymakers will ultimately need to tighten that aggressively. :contentReference[oaicite:3]{index=3}

ING commented; “We think the bar is still relatively high for a Bank of England rate hike.”

For GBP/EUR, the 1.1620-1.1650 area remains the immediate support zone.

A decisive break below this region would increase the risk of a move towards 1.1600 and then MUFG's 1.1560 target.

A recovery above 1.1700 would ease the immediate pressure, but Sterling may struggle to make sustained progress while gilt yields remain elevated and the ECB continues to signal tighter policy.

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TAGS: Pound Euro Forecasts