UBS Forecasts Sterling Gains Against Euro on Hawkish Bank of England Stance

The euro is expected to weaken against the British pound over the coming quarters, with analysts at UBS forecasting the EUR/GBP exchange rate will drift lower toward 0.84. The projection is based on a hawkish outlook for the Bank of England and a favorable interest rate differential that supports sterling.

Divergent Central Bank Outlook

According to UBS, the Bank of England's (BoE) recent policy meeting has set a hawkish tone for markets. Although the BoE left its Bank Rate unchanged at 3.75% in September, a 6-3 voting split, with three members favoring an immediate hike, signaled a strong inclination to tighten policy further. The bank now expects the BoE to raise rates at its November and February meetings.

In contrast, while the European Central Bank (ECB) raised its deposit facility rate to 2.5% in September, UBS believes market expectations for another three to four hikes have become "overly hawkish." Analysts at the bank suggest the ECB will likely move in line with the Federal Reserve, which could limit further independent support for the euro.

Key Drivers for Sterling

The case for a stronger pound is supported by several factors beyond monetary policy expectations, according to the UBS report. These create a compelling environment for investors holding sterling.

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• Interest Rate Differential: The UK currently offers approximately 1.5 percentage points of additional yield compared to the euro, creating what UBS calls a "meaningful carry advantage" for GBP investors.
• Economic Data: Recent economic data from the UK has been stronger than analysts had expected.
• Market Positioning: Sterling positioning among investors remains relatively cautious, which leaves room for further gains driven by "short covering" as traders close out bearish bets.

Forecasts and Potential Risks

UBS has set a price target for EUR/GBP at 0.84 by December 2026, followed by a slight rebound to 0.85 through 2027. Analysts see the pair trading in a range between the next major support level at 0.8350 and a new resistance level at 0.8620.

However, analysts noted that German fiscal easing is providing some support to the Eurozone economy, which should prevent a more severe decline in the pair. Key risks that could push EUR/GBP higher include stronger-than-expected Eurozone growth or renewed concerns about UK fiscal policy, with domestic politics remaining an important "wildcard."