The Bank of England may trigger a wave of interest rate cuts, and the GBP exchange rate will face downward pressure.

The GBP Exchange Rate Faces Challenges from Monetary Policy

According to MUFG, the British pound will face significant depreciation risks in the coming years. Forecasts indicate that the GBP/EUR exchange rate could fall to 1.11 by the end of 2026, lower than the recent highs the pound has reached.

Although the GBP exchange rate has recently shown positive signals by surpassing 1.1560, MUFG believes that the sustainability of this increase will be very limited. The main pressure comes from the yield advantage— a key factor supporting the currency— which will continue to diminish, forcing the GBP exchange rate to adjust lower.

Expectations of a Stronger Rate Cut Cycle

The biggest turning point could come from the decisions of the Bank of England. While the market currently prices in fewer than two rate cuts in 2026, MUFG forecasts that the Bank of England will need to implement at least two rate cuts before August. This gap between market expectations and MUFG’s outlook indicates that the pressure on the GBP exchange rate will be even greater.

Wage Growth Rate Will Be the Key

MUFG also expects that the pace of wage growth will slow significantly. If this occurs, inflationary pressures in the services sector will ease slightly, thereby expanding the room for monetary policymakers at the Bank of England to implement additional rate cuts. This scenario will continue to weaken the GBP exchange rate in the long term.