British Pound to Euro Forecast: GBP Dips, Political Risks for Sterling

– Written by


David Woodsmith

STORY LINK British Pound to Euro Forecast: GBP Dips, Political Risks for Sterling

The Pound to Euro (GBP/EUR) exchange rate drifted lower to near 1.1570 on Friday as markets reacted to the UK local election results and the potential implications for Prime Minister Starmer after heavy Labour losses increased pressure on his leadership.

Geo-political developments continued to be watched very closely while markets also assessed how much political uncertainty has been priced into Sterling. Full local election results are still being finalised over the weekend.

GBP/EUR Forecasts: Drifting Lower

ING expects GBP/EUR will retreat towards 1.15 and added; “The key point is that the pound and gilts are currently embedding no visible political risk premium.”

It added; “This leaves scope for potentially significant downside risks, and given the more positive response of the euro to de-escalation headlines yesterday, we still see room for EUR/GBP to rally.”

BNY sees limited Sterling downside as overseas ownership of gilts has already declined sharply.

It added; “Even if fiscal loosening is the outcome, we don’t foresee an impact along the lines of the 2022 minibudget shock, and GBP’s downside may be more contained this time.”

Local election results released overnight confirmed substantial Labour losses across England, Scotland and Wales, while Reform UK and the Greens made strong gains.

MUFG commented before the results; “These local elections may attract more market attention than usual given Prime Minister Keir Starmer’s precarious political position.”

The bank’s base case remains that UK Prime Minister Starmer signals another policy reset and survives with diminished authority.

According to the bank; “In this scenario, Labour MPs prioritise leadership stability and there is no obvious successor able to command sufficient support within the party.”

It added; “The response is largely contained to a cabinet reshuffle. As a result, the local elections would have only a limited impact on the gilt market and GBP.”

It does note the risk of an even weaker performance with Starmer in very serious difficulties.

It added; “Gilt yields and GBP would likely react more negatively if heightened political uncertainty were accompanied by increased fiscal risks, particularly in the event that Labour were to shift towards a more left-leaning leader such as Rayner or Burnham.”

ING looked at wider issues; “Right-wing Reform UK is widely expected to perform well in these elections, but it would probably be a strong result for the left-wing Greens that would attract the most market attention.”

According to the bank; “Such an outcome could fuel speculation that Labour may shift towards a more left-leaning leadership, potentially reviving concerns around fiscal sustainability.”

According to Bank of America; “Markets appear to have taken a relaxed view to the May local elections.”

It considers the risks are underpriced.

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TAGS: Pound Euro Forecasts