Pound Weakens Against Euro: MUFG Forecasts GBP/EUR Pullback to 1.11 as BoE Cuts Loom

Current Market Momentum and Pullback Risk

The British Pound has recently surged against the Euro, hitting its strongest level in three months above the 1.1560 mark before retreating to 1.1510. However, market analysts warn that this rally may face significant headwinds in the coming months. Financial institutions like MUFG are suggesting the currency’s strength could be temporary, with the GBP/EUR exchange rate expected to slide toward 1.11 by the end of 2026.

What’s Driving the Pound’s Decline?

The primary culprit behind the anticipated weakness is the narrowing interest rate advantage that has been supporting Sterling. As yield differentials compress, the currency loses one of its key support mechanisms. More importantly, the Bank of England is preparing to shift its monetary stance, with rate-cutting cycles now becoming increasingly likely.

BoE Rate Cuts: A Turning Point

While market consensus currently prices in fewer than two rate reductions in 2026, MUFG’s research suggests a more aggressive easing path ahead. The bank’s economists anticipate the BoE will deliver at least two rate cuts by August 2026. This divergence from market expectations could mark a critical inflection point for Sterling’s trajectory.

The reasoning behind these anticipated cuts centers on cooling wage pressures and services-sector inflation. Should wage growth indeed decelerate as MUFG predicts, policymakers will have clearer justification to cut rates more aggressively, potentially creating a consensus among the rate-setting committee.

Implications for 2027 and Beyond

The implications of this rate-cut scenario extend into 2027, with the pound facing sustained depreciation pressure against the euro. For investors and traders tracking currency pairs or pricing assets like bitcoin price in EUR terms, the GBP/EUR movement serves as a broader indicator of monetary policy divergence between the UK and eurozone. A weaker pound relative to the euro could influence the relative attractiveness of various asset denominations across different currencies.

The convergence toward 1.11 would represent roughly a 3.5% depreciation from current levels, signaling a material repricing of UK interest rate expectations and the shifting balance of yield advantages in the currency markets.