Pound Sterling Forecast: Falling UK Gilt Yields Lift GBP/EUR towards €1.20

Modified: Thursday, 29 October 2026 20:31 BST - Written by Frank Davies

STORY LINK Pound Sterling Forecast: Falling UK Gilt Yields Lift GBP/EUR towards €1.20

The Pound to Euro (GBP/EUR) exchange rate edged higher on Thursday after the European Central Bank (ECB) left interest rates unchanged and offered little encouragement to investors expecting further monetary tightening.

At the time of writing, GBP/EUR was trading at approximately €1.1963, up modestly from Thursday's opening levels and approaching the psychologically important €1.2000 mark.

The Euro (EUR) weakened against several major currencies as investors assessed the ECB's latest interest rate decision and accompanying guidance.

As widely expected, policymakers kept borrowing costs unchanged at 2.65% at their October meeting.

With the decision already reflected in market pricing, attention turned to comments from ECB President Christine Lagarde about the outlook for inflation and interest rates.

Lagarde reiterated that the central bank had yet to identify any 'risk of second round effects [of inflation]' beyond those already incorporated into its projections.

Her remarks suggested that policymakers remain cautious about responding too aggressively to the recent increase in energy-driven inflation.

Although markets continue to anticipate a possible ECB interest rate increase in December, the absence of a stronger warning about persistent price pressures prompted some investors to reassess the likelihood of further tightening.

This weighed on the Euro, allowing Sterling to extend its recent gains against the single currency.

The Pound (GBP), meanwhile, maintained a modest upward bias as UK government borrowing costs continued to decline following Chancellor John Healey's Autumn Budget.

Wednesday's fiscal announcement broadly matched market expectations, with Healey confirming that the government retained £15bn of headroom under its fiscal rules.

Although this represented a decline from the £23.6bn reported in March, the figure was largely in line with forecasts and avoided a more damaging surprise for bond investors.

The Chancellor also refrained from introducing major fiscal measures that could have unsettled markets or raised fresh concerns about the sustainability of government borrowing.

The relatively reassuring response helped UK gilt yields retreat further.

The benchmark 10-year yield fell to around 5.32%, while the 30-year yield declined to approximately 5.71%.

Lower borrowing costs offered some relief to the government, potentially reducing pressure on the Treasury's finances and helping to support Sterling sentiment.

However, the Pound's advance remained relatively restrained as investors continued to assess the weaker economic outlook presented alongside the Budget.

The Office for Budget Responsibility (OBR) substantially downgraded its forecast for UK growth in 2027, raising concerns that economic momentum could slow more sharply than previously anticipated.

The contrasting signals have left Sterling benefiting from greater stability in bond markets while remaining vulnerable to doubts about the UK's medium-term growth prospects.

Near-Term GBP/EUR Forecast: Weak Eurozone GDP Could Push Sterling Above €1.20

The Pound to Euro exchange rate could challenge the €1.2000 level as investors turn their attention to Friday's preliminary Eurozone GDP figures.

Economists expect quarterly growth to have slowed from 0.6% to 0.2% during the third quarter, reflecting the pressure that elevated energy costs have placed on households and businesses.

A weaker-than-expected reading would raise further questions about the resilience of the Eurozone economy, particularly as France continues to face substantial fiscal challenges.

Evidence of slowing growth could also make the European Central Bank more reluctant to raise interest rates again in December, potentially putting additional pressure on the Euro.

Such an outcome could allow GBP/EUR to extend its recent advance and test the €1.2000 level.

A sustained move above this area would represent an important psychological breakthrough for Sterling, potentially encouraging further buying interest.

However, stronger-than-expected Eurozone growth could provide some relief for the single currency, particularly if investors interpret the figures as giving the ECB greater scope to tighten monetary policy.

For the Pound, Friday's relatively quiet UK economic calendar means developments in government bond markets are likely to remain an important influence.

Further declines in gilt yields could reinforce confidence that the Autumn Budget has avoided a negative market reaction, helping Sterling retain its recent gains.

Conversely, a renewed increase in borrowing costs or greater concern about the OBR's weaker growth projections could limit the Pound's upside.

With GBP/EUR trading close to €1.20, the Eurozone growth figures and the continuing reaction to the UK's fiscal plans may determine whether Sterling can break through this key level before the weekend.

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