UK political uncertainty impacts EUR/GBP exchange rate

The euro is expected to gain ground against the pound in the coming weeks as political uncertainty and mounting fiscal pressures weigh on the United Kingdom, according to a note from Brown Brothers Harriman.

The firm said the EUR/GBP pair is likely to drift higher, with some market projections pointing toward 0.88 by mid-year, as traders reassess the outlook for sterling amid questions over government stability, leadership risks and rising borrowing costs.

Fiscal concerns deepen as growth lags borrowing costs

Brown Brothers Harriman analyst Haddad noted that UK gilts and the pound continue to underperform their peers, highlighting concerns around the country’s fiscal position.

Nominal GDP growth in the United Kingdom remains below the yield on 10-year gilts, a sign that debt dynamics are becoming more challenging. The 10-year government bond yield is holding around 4.749%, while the International Monetary Fund has cut its 2026 UK growth forecast to just 0.8%.

This gap between economic growth and borrowing costs is seen as undermining fiscal credibility at a time when borrowing is rising and growth is slowing, adding pressure to the pound.

Political uncertainty ahead of key may 7 elections

The fiscal backdrop is being compounded by a deteriorating political environment.

Prime Minister Starmer is under renewed scrutiny after questions were raised over whether proper security checks were carried out before Peter Mandelson’s appointment as ambassador. The controversy has sharpened focus on government procedures and judgment at a sensitive moment.

These concerns are unfolding ahead of local and Scottish elections on May 7, now widely viewed as a critical test of the administration’s support. Forecasts suggest Labour could suffer heavy losses across English councils, with some projections pointing to a net loss of nearly 1,900 seats as support shifts to rival parties.

Leadership risk within labour

The Labour party’s rules allow for a leadership contest if a challenger secures backing from at least 20% of Labour members of parliament, or if the leader resigns.

Analysts see a weak showing in the May 7 elections as a potential trigger for such a challenge, introducing an additional layer of political risk. Even if Starmer retains his position, the prospect of internal turmoil is seen as negative for sterling.

Public approval at historic lows

Polls show public approval for Starmer at historically low levels for a sitting British prime minister. While some recent surveys indicate a modest improvement after his handling of the Iran conflict, overall sentiment remains weak and fragile.

This persistent discontent adds to market concerns that the government may struggle to push through credible fiscal measures or restore confidence.

Implications for the pound and euro

Brown Brothers Harriman argues that this combination of political instability and fiscal strain supports a gradual strengthening of the euro against the pound.

Based on current interest rate differentials and UK underperformance in gilts and currency markets, the firm expects EUR/GBP to edge higher in the coming weeks. Other banks and technical analysts are also flagging upside risk for the pair, with some targeting 0.88 by mid-year.

For traders with exposure to sterling, the period around the May 7 elections is seen as a likely flashpoint for volatility, as political headlines and election outcomes feed directly into market pricing of the pound versus the euro.

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