MUFG Anticipates Pound Sterling Drop: GBP/EUR Could Reach 1.11 in 2026 Due to Bank of England Rate Cuts

GBP/EUR Exchange Rate Analysis: Will the Rally Be Sustainable?

The British pound has experienced a notable strengthening in recent weeks, reaching three-month highs above 1.1560 against the euro. However, according to MUFG’s analysis, this gain may not be lasting. The investment institute projects that the GBP/EUR pair will depreciate to 1.11 by the end of 2026, marking a significant shift in the dynamics of the British currency.

BoE Rate Cuts: A Key Factor for the Pound

The Bank of England will play a crucial role in this expected decline. Although the current market consensus suggests fewer than two rate cuts during 2026, MUFG maintains a more aggressive outlook, anticipating at least two monetary easing measures before August. This divergence between market expectations and the bank’s projections reflects a different assessment of inflation and economic growth trends.

The narrowing of yield differentials between British and European bonds will act as a brake on the pound. As the Bank of England implements its rate cuts, the yield gap will tighten, reducing the attractiveness of assets denominated in pounds for international investors.

Wage and Inflation Outlooks: The Catalyst for Policy Decisions

MUFG also anticipates a slowdown in wage growth in the UK, a development that could provide the necessary space to ease inflationary pressures in the services sector. This scenario would pave the way for policymakers to support the expected rate cuts, thus validating the BoE’s more flexible stance.

The combination of lower yields and more moderate inflation in services would create the perfect environment to justify a shift toward expansionary monetary policy, which would eventually exert pressure on the pound.