Pound to Euro Week Ahead Forecast: France Crisis Threatens ECB Rate Hikes

Modified: Monday, 5 October 2026 07:01 BST - Written by Frank Davies

STORY LINK Pound to Euro Week Ahead Forecast: France Crisis Threatens ECB Rate Hikes

The Pound to Euro exchange rate (GBP/EUR) surged to 10-week highs above 1.1750 as mounting concerns over French debt and the wider Eurozone bond market triggered renewed Euro selling.

Pound Sterling has also benefited from expectations of Bank of England tightening and hopes of closer UK-EU relations, although analysts warn that aggressive BoE rate-hike pricing could eventually become a significant headwind for the Pound.

GBP/EUR Forecasts: French fears erupt

MUFG expects the Pound to Euro (GBP/EUR) exchange rate will hold steady in the short term before a retreat to 1.1430 by the third quarter of 2026.

Despite Euro-zone bond fears, the bank expects a shift in Bank of England expectations will undermine the Pound.

According to MUFG; “The notable pick-up in rate hike expectations can act to support the pound over the short-term as the BoE delivers (two hikes in our view). But four rate hikes is excessive and that should see EUR/GBP drift higher in 2027.”

GBP/EUR posted significant gains during the week, primarily due to Euro weakness, with 10-week highs just above 1.1750.

Markets were less confident that the ECB would sanction further aggressive interest rate hikes and there were also notable concerns surrounding the French fiscal position as bond yields moved sharply higher.

The potential for closer UK relations with the Euro area also helped underpin the Pound.

ING commented on the French position; “Little prospect of fiscal consolidation anytime soon leaves French debt vulnerable over the coming months, and yesterday dramatically questioned whether the ECB could push ahead with another 75bp of tightening during a very difficult time for European government bond markets.”

It added; “Investors assume that any ECB fix to the bond market sell-off either involves much less or no tightening of policy (euro bearish) or, in extremis, the use of the Transmission Protection Instrument to buy bonds (very euro bearish).”

Domestically, markets are expecting a Bank of England rate hike in November and expecting four rate hikes over the next 12 months.

There are considerable doubts whether this pricing is realistic.

Rabobank noted short-term GBP support, but commented; “In our view, it is more likely that GBP could soften as rate hike risks are reined in."

Nevertheless, it also noted Euro vulnerability; "That said, headwinds to growth in the Eurozone plus political uncertainties in both France and Germany could limit the EUR’s potential and reduce upside potential for EUR/GBP into the new year.”

It has a 3-month GBP/EUR forecast of 1.15.

Fiscal policy will be a key element over the next few weeks.

According to MUFG; “The budget takes place on 28th October and it’s like Groundhog Day! Headroom has shrunk from GBP 23.6bn to possibly around GBP 12bn and hence Chancellor Healey will be constrained by what he can offer.”

It did add; “If Chancellor Healey presents a credible budget in October and the Gilt market stabilises it could help limit downside risks and keep EUR/GBP rangebound.”

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TAGS: Pound Euro Forecasts