The Pound to Euro (GBP/EUR) exchange rate has traded in relatively narrow ranges over the past two weeks, but has strengthened to 5-month highs just below 1.1590 as the Euro has corrected lower in global markets.
MUFG remains sceptical over the medium-term Pound outlook and expects further Bank of England (BoE) rate cuts, coupled with political stresses, will undermine the Pound over the medium term. It forecasts that GBP/EUR will slide to 1.11 by the end of 2026
The bank expects a stronger economic performance during the first quarter of 2026, but is doubtful that the positive trend will continue for the year as a whole.
MUFG notes the possibility of a surprise BoE rate cut in March but, at this stage, it is backing cuts in May and August which will undermine yield support for the Pound.
The bank considers that political developments will have an important impact on the Pound. Labour is facing a difficult by-election in Manchester and the May local elections will also be an important test for the government.
Adverse results would increase pressure on Prime Minister Starmer and MUFG considers that any leadership challenge would undermine the Pound amid fears that fiscal policy would be compromised.
