The British Pound Could Retreat: MUFG Anticipates GBP/EUR at 1.11 due to BoE Rate Cuts

MetaverseVagabond · 2026-01-15T14:42:08+00:00

The GBP/EUR exchange rate recently peaked above 1.1560 but is projected to decline to 1.11 by the end of 2026. This forecast is driven by anticipated interest rate cuts from the Bank of England, along with a slowdown in wage growth, which could relieve inflation pressures and prompt the bank to lower rates. Investors should monitor this pair closely as significant shifts in the GBP/EUR dynamics are expected.

MetaverseVagabond

2026-01-15 14:42:08

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The GBP/EUR Journey: From 1.1560 to the 2026 Reality

The GBP EUR pair has recently experienced a moment of glory, reaching a three-month high above 1.1560 before retreating to 1.1510. However, according to MUFG analysis, this rally may not have long legs. The institution projects that GBP/EUR could fall to 1.11 by the end of 2026, marking a significant retracement from current levels.

Why Will the Bank of England Tighten the Screws?

The expected decline in the GBP EUR exchange rate mainly responds to a phenomenon known among traders: the erosion of yield advantages. When a central bank begins to cut interest rates, that country’s currency tends to weaken against its peers, especially if other central banks maintain more restrictive policies.

The Bank of England is preparing for a change in course. Although the current market bets on fewer than two rate cuts in 2026, MUFG has a different view: it expects the BoE to implement at least two rate cuts before August. This is the key factor that should pressure the pound.

Service Inflation and Wage Growth: The Pieces of the Puzzle

MUFG also anticipates a slowdown in wage growth, a data point that should not be underestimated. In the UK, wages have been one of the biggest inflation issues, particularly in the services sector. If that growth finally moderates, as the bank predicts, we would be looking at significant relief from inflationary pressures.

This would be music to the ears of BoE policymakers, who need justification to support those rate cuts. The convergence of these factors — controlled inflation, moderate wages, and the need to stimulate the economy — paints a scenario where two rate cuts in 2026 could become a reality.

The Future of GBP/EUR: Vigilance Needed

For investors, this means putting the GBP EUR pair on the watchlist. The transition from 1.1510 to 1.11 would not be a radical move in currency markets, but it would represent a significant reconfiguration of BoE-ECB dynamics over the next 18 months.

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