Pound to Euro Week Ahead Forecast: Pill Backs September Rate Hike as GBP Recovers

Modified: Monday, 7 September 2026 07:01 BST - Written by Frank Davies

STORY LINK Pound to Euro Week Ahead Forecast: Pill Backs September Rate Hike as GBP Recovers

The Pound to Euro exchange rate (GBP/EUR) recovered towards 1.1640 after sliding to two-month lows below 1.1620, with hawkish comments from Bank of England Chief Economist Huw Pill providing Sterling with some relief.

The outlook remains finely balanced, however, as deep divisions over the need for higher rates collide with record gilt yields, elevated energy costs and renewed concerns over UK fiscal policy

GBP/EUR Forecasts: Crucial Internal BoE Debate

MUFG forecasts that the Pound to Euro (GBP/EUR) exchange rate will retreat to 1.1430 by the second quarter of 2027 as the Bank of England decides against rate hikes.

In contrast, Credit Agricole is backing gains to 1.19 by the end of next year.

GBP/EUR dipped sharply to 2-month lows just below 1.1620 during the week before a recovery to 1.1640.

The Pound recovered ground after Bank of England (BoE) chief economist Pill called for a September rate hike to 4.00%, but there are clear divisions within the bank and energy fears increased during the week as gas prices hit fresh 3-year highs.

MUFG noted; “The pound continues to outperform relative yield changes and based on EZ-UK 2yr spreads, EUR/GBP should be trading between 0.8800-0.8900. (1.1230-1.1360 for GBP/EUR) Better economic growth and weaker inflation has helped improve investor confidence.”

The bank does expect that confidence will be eroded to some extent. MUFG notes that markets are pricing in UK BoE rates of close to 4.50% by the third quarter of 2027.

It added; We suspect this pricing is excessive and will adjust lower as domestically generated inflation remains subdued and energy risks subside. PM Burnham’s honeymoon period looks to be coming to an end and the fiscal constraints on adopting any meaningful policy initiatives to support economic growth could raise fears of steps that lack fiscal credibility.

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

The bond market will be a key element, especially after a fresh surge in yields over the past week. The 10-year yield jumped to 18-year highs just above 5.20% before a limited retreat.

The jump in yields will increase UK debt-servicing costs and raise wider concerns surrounding fiscal policy.

There are concerns that the UK is particularly vulnerable in comparison with Euro bonds. Rabobank commented; “Foreign ownership of the latter is reported to be at a record high and, according to the OBR, well above the advanced economic average.”

The bank added; “While tax hikes could have growth limiting implications, they would at least protect the government’s fiscal rules and settle the nerves of a gilt market fearful of increased supply. We expect further range trading in EUR/GBP over the coming weeks, with a mild upside bias later in the year as UK fiscal realism weighs and BoE rate hike risk is further priced out.”

Credit Agricole is uneasy over the Euro; “European political and fiscal risks could grow as well. In the near-term, FX investors will focus on the outcome of the German regional elections. In the medium term, focus would shift to the outcome of the French presidential elections in Q227 where political and fiscal risks are very closely connected.”

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TAGS: Pound Euro Forecasts