British Pound to Euro Forecast: UK Budget Growth Downgrade Halts GBP Rally

Modified: Thursday, 29 October 2026 07:31 BST - Written by James Fuller

STORY LINK British Pound to Euro Forecast: UK Budget Growth Downgrade Halts GBP Rally

The Pound to Euro exchange rate (GBP/EUR) retreated from 18-month highs above 1.1960 after Chancellor John Healey's Budget revealed a sharp downgrade to the UK's 2027 growth outlook.

Pound Sterling held close to 1.1940 as continued Euro weakness limited the decline, but reduced fiscal headroom and the decision to defer difficult spending choices raised questions over the sustainability of the government's plans.

GBP/EUR Forecasts: Retreat from 18-Month Highs

Chancellor Healey’s budget did not have a major initial impact on the Pound. There were a few minor measures to help cut costs for many consumers, but Healey avoided any major measures on taxes or spending while the 2027 GDP growth forecast was cut sharply.

After hitting 18-month highs just above 1.1960, the Pound to Euro (GBP/EUR) exchange rate retreated to near 1.1940 with a weak Euro still providing underlying Pound support.

According to ING, GBP/EUR can hold a firm tone; “we do not see any clear reasons why EUR/GBP needs to bounce at the moment.”

According to Rabobank Head of FX Strategy Jane Foley; "Right now, the budget hasn’t meant an awful lot for the pound. The silver lining of the (2022 Liz)Truss budget is it has created an environment where politicians don’t want to create any ruckus for the market.”

There will, however, need to be big adjustments to meet medium-term budget targets. There are also still important underlying stresses in global markets with a particular focus on energy prices.

Brent crude is trading at close to 6-month highs while gas prices increased again are trading at the highest level since late 2022.

Higher energy prices will put upward pressure on inflation, curb growth and have implications for Bank of England policy. If there is no relief soon, there will also be a big impact on fiscal with a risk that fiscal headroom will collapse.

There will also be a negative impact on the Euro-Zone with French bond concerns still hurting the single currency.

There was a small decline in the 10-year gilt yield after the budget while the FTSE 100 index secured a limited advance amid relief in the banking sector following a smaller than expected increase in banking-sector taxes.

As far as growth is concerned, the Office for Budget Responsibility (OBR) has raised its 2026 GDP growth forecast to 1.2% from 1.0% in March, but the 2027 forecast has been lowered sharply to 1.0% from 1.6%.

As far as fiscal headroom is concerned, Healey stated that tax revenue will be £15bn above current spending in 2029/30 compared with £24bn in the March update.

BNP Paribas UK Economist Dani Stoilova commented; "We think the projected headroom of £15bn in 2029/30 was the minimum amount likely acceptable to the market given consensus expectations of £15-20bn"

He added; "The government has opted to defer significant, more contentious decisions (e.g. defence spending, welfare reforms) to future fiscal events, perhaps even to the next parliament. This means some uncertainty about the medium-term outlook for policy lingers, despite today’s announcements."

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TAGS: Pound Euro Forecasts