EUR/GBP Heads Lower as BoE Hawkishness and UK Rate Advantage Gain

UBS is predicting that the EUR/GBP exchange rate will continue to drift lower over the coming quarters, citing the Bank of England's hawkish signals and the UK's higher interest rate differential versus the Eurozone.

The broker expects the BoE to raise rates at both the November and February meetings, following a 6-3 voting split at its September meeting where three members preferred an immediate rate increase. The European Central Bank raised its deposit facility rate for the second time this year to 2.5% at its September meeting.

UBS believes that rate expectations for both central banks have become overly hawkish, and that the ECB is expected to continue moving broadly in line with the Federal Reserve, limiting additional support for the euro.

The UK currently offers a meaningful carry advantage for GBP investors due to its roughly 1.5 percentage points of additional yield relative to the euro, according to UBS.