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UBS Forecasts EUR/GBP to Fall to 0.84 on Hawkish BoE and Rate Differential
Summary
Analysts at UBS project the euro will weaken against the British pound, citing a hawkish Bank of England policy stance and a significant interest rate advantage that favors holding sterling.
The euro is expected to decline against the British pound over the coming quarters, with analysts at UBS forecasting the EUR/GBP exchange rate to fall to 0.84. The bank attributes this outlook to a hawkish monetary policy signal from the Bank of England (BoE) and a compelling interest rate differential that supports sterling.
Divergent Central Bank Outlooks
According to UBS, the BoE's decision to hold its benchmark rate at 3.75% in September was interpreted by markets as a hawkish stance due to the 6-3 vote, in which three members favored an immediate rate hike. UBS now anticipates the BoE will implement two additional rate increases, one in November and another in February of next year.
While the European Central Bank (ECB) raised its deposit facility rate to 2.5% in September, and markets are pricing in three to four more hikes, UBS believes rate expectations for both central banks are "overly hawkish." The bank also noted that the ECB's policy path is likely to largely follow the U.S. Federal Reserve, which could limit further upside for the euro.
Sterling's Carry Trade Advantage
A key factor supporting the pound is the significant yield advantage the UK offers over the Eurozone. UBS calculates this interest rate differential at approximately 1.5 percentage points, creating an attractive carry trade for investors.
AdThis dynamic allows investors holding long positions in the pound to potentially benefit from both the currency's gradual appreciation and the positive carry, or yield, from the interest rate gap. UBS also highlighted that UK economic data has been stronger than anticipated, while market positioning in sterling remains cautious, leaving room for a potential short-covering rally.
Forecasts and Key Levels
UBS provided a specific forecast path for the EUR/GBP pair, which stood at a spot rate of 0.86 as of September 17, 2026:
- December 2026: 0.84
- March 2027: 0.85
- June 2027: 0.85
- December 2027: 0.85
From a technical perspective, analysts see the previous support level of 0.8620 now acting as resistance. The next major support level is identified at 0.8350, with the pair expected to trade within this range in the coming months. Downside risks for EUR/GBP include stronger-than-expected UK growth or more aggressive BoE tightening. Conversely, a move above 0.86 could be driven by surprisingly strong Eurozone growth or renewed concerns over UK fiscal policy, UBS added.
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