Forecast of GBP/EUR exchange rate weakness towards 1.11: MUFG anticipates correction after reaching quarterly highs

Analysis of the Pound-Euro Exchange Rate Projection

MUFG has issued a pessimistic projection for the British Pound, estimating that the GBP/EUR pair will fall to 1.11 by the end of 2026. This prediction contrasts significantly with the recent performance of the British currency, which recently hit three-month highs above 1.1560 before retreating to 1.1510.

What’s Behind the Projected Correction?

The main cause of this bearish projection lies in the erosion of yield differentials. As the Bank of England implements interest rate cuts, the Pound will lose one of its main attractions for investors. MUFG forecasts that the BoE will implement at least two rate reductions before August 2026, which will stand in considerable contrast to current market expectations, which estimate fewer than two cuts for the entire year.

The Crucial Role of UK Monetary Policy

Decisions by the Bank of England will be decisive for the trajectory of the GBP/EUR exchange rate in the coming months. The pound’s movement will depend significantly on the speed and magnitude of the cuts implemented by the monetary authority.

Meanwhile, MUFG predicts a moderation in UK wage growth, which could ease service inflation. This scenario would allow policymakers to confidently support rate cuts, thus reinforcing the bearish thesis for the Pound against the Euro during 2026-2027.

Conclusion

Although recent optimism has pushed the GBP/EUR to quarterly highs, the projected retreat to 1.11 reflects an increasingly complicated macroeconomic reality for the British currency. The combination of rate cuts and wage slowdown sets the stage for the pound to face sustained downward pressures.