BoE Rate Hold Sparks EUR/GBP Forecasts to Fall Below 0.85

The Bank of England’s decision to hold its benchmark interest rate at 3.75% in September, despite a 6-3 vote favoring an immediate increase, has set the stage for further tightening ahead. With UBS forecasting the BoE to raise rates in November and February, the euro-to-pound (EUR/GBP) exchange rate is expected to weaken further, according to recent forecasts. The spot rate stood at 0.86 on September 17, but projections suggest it could fall to 0.84 by December 2026 and remain around 0.85 through mid-2027, before stabilizing at 0.85 by year-end 2027. A purchasing power parity (PPP) estimate places the equilibrium rate at 0.83, while trend-extrapolated equilibrium suggests a long-term target of 0.87. Key support levels include 0.8350 and 00.8620, with the latter acting as resistance after a prior rally. The divergence between the BoE and the European Central Bank (ECB)—which raised its deposit facility rate to 2.5% in September—has intensified the carry advantage for GBP investors, offering around 1.5 percentage points more yield than the eurozone. This disparity, combined with BoE rate hikes, is expected to sustain downward pressure on EUR/GBP, despite recent resistance at 0.8620.