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Key Moments

  • EUR/GBP dropped to a new low of 0.8649 as the Pound outperformed.
  • Markets have been pricing in a more hawkish Bank of England stance amid stronger UK growth momentum and persistent inflation pressures.
  • MUFG flags that upcoming domestic political developments could prompt at least a temporary Pound sell-off in the weeks ahead.

Repricing of BoE Policy Supports Pound

MUFG’s Lee Hardman reports that the Pound (GBP) has strengthened, driving EUR/GBP to new lows as investors adjust expectations toward a more hawkish Bank of England (BoE). This shift has been driven by signs of firmer United Kingdom (UK) economic activity and inflation that has remained elevated.

According to Hardman, “The pound outperformed last week resulting in EUR/GBP falling to a fresh low overnight of 0.8649.”

He notes that the currency has been buoyed by changing interest rate expectations: “The pound has been supported by the hawkish repricing of BoE rate hike expectations encouraged by further evidence of stronger UK growth momentum at the start of this year while underlying inflation pressures remained uncomfortably high at the start of the energy price shock.”

Outlook for BoE Decision and MPC Votes

Hardman outlines his expectations for the upcoming BoE policy meeting, indicating that policymakers are likely to keep rates unchanged while maintaining a hawkish tone. He states, “We expect a hawkish hold this week with two MPC members Chief Economist Pill and MPC member Mann voting for a hike.”

Higher UK yields are currently a key pillar of support for the Pound. Hardman explains that this rate backdrop is helping the currency withstand other negative influences, commenting that, “Support for the pound from higher UK rates is currently offsetting headwinds from higher energy prices while the UK economy is holding up, and domestic political risks ahead of the local elections.”

Political Uncertainty as a Potential Headwind

Despite the recent strength in GBP, Hardman cautions that domestic politics may emerge as a source of volatility. He highlights rising political risks centered on Prime Minister Starmer’s leadership and notes that these developments could weigh on the currency.

He warns, “Domestic political developments have the potential to trigger at least a temporary sell-off for the pound in the coming weeks.”

EUR/GBP Snapshot

Currency PairRecent MoveDriver
EUR/GBPFell to 0.8649Hawkish BoE repricing and stronger UK growth with sticky inflation
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