The pound-to-euro exchange rate (GBP/EUR) climbed to five-week highs above 1.1460 before easing back toward the 1.1430 area.
MUFG expects a closely contested decision at the Bank of England’s (BoE) December policy meeting, with hawkish members likely to resist a rate cut. However, the bank anticipates that Governor Andrew Bailey will shift his stance and secure a majority in favor of lowering the policy rate to 3.75%.
MUFG also forecasts two additional interest-rate cuts in 2026. While the budget did not deliver any negative surprises, tax increases are still expected to weigh on economic growth, which could gradually limit support for the pound.
At this stage, MUFG continues to pencil in a 25-basis-point rate cut in mid-2026, but notes that the risk of no further easing has increased. The bank also sees a scenario in which any rate cut could be driven by currency strength rather than outright economic weakness.
Even assuming only one final cut, MUFG expects yield differentials to continue exerting overall downward pressure on sterling.