The British pound is poised to strengthen against the euro as investors seek higher yields, with UBS forecasting the EUR/GBP exchange rate will decline to 0.85 by September 2027, down from current levels around 0.84.
UBS highlighted a 1.5 percentage-point yield advantage for sterling over the euro as a primary driver, alongside elevated short positions in the pound that could fuel further short-covering. The bank noted recent UK economic data has been supportive, while the impact of lower oil prices and expectations of stable fiscal policy have reduced downside risks.
The forecast assumes the European Central Bank will deliver its final interest rate hike in September, effectively ending the current monetary tightening cycle. UBS also pointed to the pound’s status as one of Europe’s highest-yielding currencies, second only to the Norwegian krone in liquidity terms. The bank acknowledged the euro’s fundamentals remain neutral but suggested much of the positive news—including fiscal stimulus-driven growth and the ECB’s rate decision—is already reflected in current pricing.
Political risk remains the most significant threat to the outlook, with UBS warning that sentiment could shift abruptly if the new UK government’s fiscal plans are perceived as unsustainable. The pound’s recent gains in June and July followed a period of stability, and markets will scrutinize November’s budget statement as lawmakers return from recess.
