UK analysts forecast the Euro-to-Pound rate to rise towards 0.87 over three months as gilt sensitivity and the October Budget threaten Sterling.
The Euro to Pound exchange rate traded near 0.8587 on Friday, leaving it approximately 1.3% below Rabobank’s three-month forecast of 0.87.
EUR/GBP eased around 0.10% during the morning session, having traded between 0.8583 and 0.8597.
However, the pair remains above its 1 September close of 0.8578 after UK fiscal concerns placed renewed pressure on Sterling.
The 48-hour chart shows EUR/GBP advancing from below 0.8570 to a high near 0.8607 before surrendering part of the increase.
The ability to hold above 0.8580 leaves the near-term bias modestly positive, although the recent high remains the first resistance level.
Foreign Gilt Ownership Raises Sterling Risk
Rabobank’s forecast rests heavily on the structure of the UK government bond market.
Foreign investors own approximately 30% of UK gilts, according to the OBR, while the Bank of England has been reducing its bond holdings since 2022.
This means a larger proportion of government debt is held by investors who may respond quickly to disappointing fiscal news or changes in borrowing costs.
Rabobank said: “Foreign investors are considered to be more reactionary to a souring of domestic news and therefore enhance the prospect of bond market jitters spilling over to the exchange rate.”
That risk has become more visible after rising gilt yields placed GBP/EUR under pressure, with ten-year borrowing costs reaching their highest level since August 2007.
The Euro Has a Structural Buffer
France also faces a difficult budget process, but investors selling French government bonds can move into debt issued elsewhere in the Eurozone without leaving the single currency.
As Rabobank put it: “GBP does not have this advantage.”
That distinction helps explain why fiscal concerns may generate more direct selling pressure on Sterling than comparable political or budget uncertainty in France.
Shorter-Term EUR/GBP Forecast: October Budget Keeps 0.87 in View
The government faces an uncomfortable choice ahead of the 28 October Budget.
Tax increases could reassure bond investors and protect the fiscal rules, but they would also weaken growth and conflict with Prime Minister Burnham’s emphasis on infrastructure and economic expansion.
Rabobank said: “We would expect that the October 28 UK budget will remain front of mind for GBP markets in the weeks ahead.”
It added: “Together these factors suggest that GBP may be more sensitive to budget concerns than many of its G10 peers.”
The bank’s conclusion is clear but remains a forecast rather than a guaranteed outcome: “In view of the proximity of the UK budget next month and the uncertainties connected with it, we expect EUR/GBP to be biased higher, towards 0.87 on a 3-month view.”
Our currency coverage draws on live market data, official economic releases and published bank research.
