**MUFG Predicts Ongoing Vulnerability for Pound Sterling Amid Fiscal and Monetary Challenges — GBP/EUR Forecast at 1.13**
*Originally reported by James Richmond, ExchangeRates.org.uk*
MUFG (Mitsubishi UFJ Financial Group), one of the largest financial institutions in the world, recently released analysis suggesting that the British pound sterling (GBP) will remain vulnerable over the medium term due to the combined impact of sustained fiscal expansion and a more dovish monetary policy outlook from the Bank of England (BoE).
This assessment implies a fragile outlook for GBP against its counterparts, notably the euro (EUR), with MUFG forecasting the GBP/EUR exchange rate to fall to 1.13 by the end of 2025.
Below are the key arguments supporting MUFG’s bearish stance on the pound, accompanied by deeper insights into the institutional and economic dynamics that are influencing exchange rate movements.
## Overview of MUFG’s GBP/EUR Forecast
MUFG’s forecast reflects growing concerns over the UK’s economic management, particularly regarding:
– Fiscal expansion likely to continue under both major political parties.
– Reduced expectations for Bank of England rate hikes.
– Deteriorating current account balance.
– Rising risk premiums on UK assets.
– Potential effects of political shifts post elections.
All of these elements, MUFG argues, create an unfavorable backdrop for the pound, and the GBP is expected to trade weaker against the euro over the next 12 to 18 months.
## Fiscal Policy: Structural Expansion Remains Intact
According to MUFG, fiscal policy in the UK is set to remain expansionary regardless of the outcomes of the 2024 and 2025 elections. Recent tax cuts and public spending commitments are evidence of a structural loosening of fiscal discipline not only from the current Conservative government but also from opposition parties promising increased investment in public services.
Key points regarding the UK’s fiscal trajectory:
– Budget deficits are expected to remain elevated well into the medium term.
– The UK debt-to-GDP ratio is set to continue rising beyond 2025.
– Increased fiscal spending will likely boost domestic demand but could create inflationary pressures.
– Long-term concerns around debt sustainability could erode investor confidence in the pound.
MUFG notes that when fiscal spending is not fully offset by revenue gains or lower borrowing costs, the exchange rate can come under downward pressure, especially if investors become apprehensive about the state’s fiscal credibility.
## Monetary Policy: Bank of England Shifts to Dovish Stance
Another major factor contributing to MUFG’s bearish forecast is a shift in expectations surrounding the BoE’s interest rate policy. Over recent quarters, economic data has pointed to slowing inflation but also weak growth, leading many in the market to believe that the BoE has reached the end of its tightening cycle and may even begin easing policy as early as 2025.
Monetary drivers influencing GBP sentiment:
– BoE rate hikes are likely over, with markets pricing in cuts in 2025.
– Inflation is moderating, reducing the need for aggressive rate action.
– UK economic growth remains tepid, increasing the need for accommodative policy.
– Divergence in interest rate expectations between the BoE and the European Central Bank (ECB) could support EUR over GBP.
If the ECB keeps rates higher for longer compared to the BoE, relative interest rate differentials would favor the euro, making the pound less attractive to investors seeking yield.
## Structural Factors and Market Sentiment
MUFG also highlights the return of risk premiums on UK assets, resulting from both domestic political volatility and external macroeconomic uncertainties. Elements that exacerbate FX risks include worsening trade balances and concerns about governance.
Important dynamics include:
– Brexit-related challenges have continued to limit trade efficiency.
– The UK’s current account deficit remains wide, reflecting persistent outflows of capital.
– Political instability, such as leadership changes or lack of transparency around economic policymaking, adds to uncertainty.
– A potential Labour-led government in 2025
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