Sterling’s slide could extend if the Bank of England cuts interest rates in December, according to MUFG Bank, which expects softer inflation data and fiscal tightening to reinforce the case for easing.
The bank said upcoming releases are likely to confirm that UK inflation has peaked, while the Nov. 26 budget may introduce tax increases to meet fiscal rules—developments that could give the BoE room to start lowering rates.
Market pricing currently implies a 66% probability of a December rate cut. MUFG said that leaves space for front-end yields to fall further, leading to continued sterling underperformance.
Reflecting that view, MUFG raised its EUR/GBP forecasts, now expecting the euro to reach 0.8900 by Q1 2026 and 0.9000 by Q2, pointing to a sustained weakening trend in the pound as policy divergence with the European Central Bank narrows.
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MUFG’s updated projections highlight persistent downside risks for GBP as markets price a December BoE cut. Expected tax hikes and easing inflation may validate policy loosening, favouring EUR strength versus GBP into 2026. Short-dated gilts could outperform as yields slip.
