Michael Savage, a senior dealer with Bank of Ireland’s Corporate & Commercial Banking division, takes a look at the Euro versus the Pound and the risks ahead.
Since early 2024, EURGBP has remained broadly stable, fluctuating within a relatively narrow range of 82p to 87p. This period of calm has led many casual market watchers to assume that the pair will continue to behave in a similarly predictable way.
However, recent developments—particularly around UK fiscal policy—have highlighted that this stability cannot be taken for granted.
“For Irish firms with commercial or financial exposure to the UK, understanding the drivers behind sterling’s performance is becoming more important”
While most analysts, including Bank of Ireland’s economics team, still expect EUR/GBP to stay largely range-bound, a number of underlying risks are emerging that could lead to increased volatility in the pair in the months ahead.
UK fiscal policy returns to centre stage
The recent change in UK government has quickly brought fiscal issues back into sharp market focus. The Labour government faces the challenge of balancing pre-election spending commitments with adherence to strict fiscal rules—particularly the pledge to balance day-to-day spending by 2029–30.
Markets reacted in late June when Chancellor Rachel Reeves reversed plans for welfare spending cuts following internal party opposition. This U-turn, along with earlier decisions such as maintaining universal fuel payments, is estimated to increase long-term spending commitments by over £6.5 billion. Investors interpreted these moves as signs that delivering on fiscal rules could be more difficult than anticipated.
Although the reaction was relatively contained, the episode served as a reminder of how sensitive UK bond markets—and by extension, sterling—can be to perceived slippage on fiscal credibility. Yields on UK gilts rose notably, echoing the tone of the 2022 “mini-budget” episode, albeit on a smaller scale. EUR/GBP tested the upper end of recent ranges at 87p, before stabilising again.
Path Forward: Tax, Borrowing or Growth?
The outlook for the Pound depends crucially on how the Labour government navigates these fiscal pressures. Looking ahead to the UK’s autumn Budget, markets see three possible outcomes:
- Higher taxes: Many analysts see this as the most likely route. Targeted tax increases that don’t breach manifesto promises could restore lost headroom without prompting significant market disruption. This may be difficult to deliver in practice.
- Rule changes and more borrowing: This route would likely be the least well received by markets. The market has already shown limited tolerance for expanded borrowing, especially if it raises concerns about long-term debt sustainability.
- Improved economic and interest rate environment: If inflation falls faster than expected, interest rates could drop, reducing government borrowing costs and easing pressure on the fiscal outlook. This is seen as the “golden path” for sterling in the medium term.
The Euro side of the equation
While UK politics have dominated the short-term story, developments in the Eurozone also matter. German plans for significantly increased expenditure over the coming years has provided support for the euro since Q1 of this year, and looks likely to continue to do so over the coming months and years. Recent communication from the European Central Bank (ECB) has suggested they may be near or at the end of their monetary policy easing cycle, again providing support for the bloc’s currency.
On the downside, economic momentum in EU remains mixed. Germany, traditionally the region’s engine, has narrowly avoided recession in recent quarters, and inflation continues to drift lower. Any undershoot of growth or inflation in the region, particularly with ongoing US tariffs risk, may result in the ECB lowering rates more than expected, thus limiting any potential gains for the Euro against the pound. This will be particularly true if UK yields remain attractive or the BoE remains hawkish in the face of persistent inflation.
Outlook: Still range-bound, but risks are building
Most currency strategists, including Bank of Ireland’s economics team, continue to expect EUR/GBP to remain within a familiar band, likely between 82p and 87p in the near term.
While recent headlines have put the pound under some pressure, there are plausible scenarios where sterling could strengthen to test the lower end of the range. If UK inflation proves persistent, the Bank of England may maintain a tighter stance for longer than the ECB, potentially supporting the currency through yield differentials.
Additionally, if the UK government manages to strike the right balance in its upcoming Budget—containing spending without derailing public support—the return of fiscal credibility could help reassure markets. Indeed, the Pound will often trade very well in risk-on environments, so continued deescalations of US tariff threats or geopolitical tensions that improve the global economic outlook will most likely benefit the sterling
Final thoughts for Irish businesses
For Irish businesses trading with or investing in the UK, the key takeaway is that sterling remains relatively stable, but with a higher degree of sensitivity to policy decisions than in previous years.
While the base case remains one of limited movement in EUR/GBP, the balance of risks has become more nuanced.
Rather than expecting continued calm by default, businesses should be aware of upcoming UK fiscal events, inflation data, and central bank commentary on both sides. In short, EUR/GBP may stay broadly within range, but it’s no longer on autopilot.
Bank of Ireland has developed a team within its Corporate & Commercial Banking division with deep expertise in helping customers to manage these financial risks, offering a broad range of product solutions and market insights. Our teams of expert relationship managers in collaboration with our treasury product specialists are prepared to support through any market volatility.
To access Bank of Ireland’s resources for businesses managing through challenging times, including our deep expertise in helping customers to manage financial risks, click here
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