EUR/GBP Exchange Rate Poised to Fall as BoE Signals Hawkish Stance

UBS expects the EUR/GBP exchange rate to gradually move lower towards 0.84 over the coming quarters due to hawkish signals from the Bank of England and the UK's higher interest rate differential versus the Eurozone.

The Bank of England left its Bank Rate unchanged at 3.75% in September, but a 6-3 voting split was interpreted as hawkish, with three members preferring an immediate rate increase. UBS expects the BoE to raise rates at both the November and February meetings.

In contrast, the European Central Bank raised its deposit facility rate for the second time this year to 2.5% in September, but markets continue to price another three to four rate hikes. The broker believes that rate expectations have become overly hawkish, and that the ECB is expected to move broadly in line with the Federal Reserve, limiting additional support for the euro.

UBS noted that UK economic data have been stronger than expected, while sterling positioning remains relatively cautious, leaving room for further short covering. The broker also highlighted the UK's 1.5 percentage points of additional yield relative to the euro, which it called a meaningful carry advantage for GBP investors.