UBS keeps EUR/GBP forecast at 0.8800 amid UK budget risks

UBS has maintained its EUR/GBP forecast at 0.8800 for end-2025 and end-2026, citing potential British pound weakness driven by UK fiscal policy concerns, particularly around the autumn budget, and broader political uncertainties. This forecast holds despite UBS adopting a less dovish Bank of England outlook, removing a 2025 rate cut, and raising its 2026 terminal rate projection. The bank noted that current consensus market positioning, heavily short GBP, influenced its decision to maintain the target, with a more neutral outlook expected for 2026.

Analysis

UBS is maintaining its EUR/GBP exchange rate forecast at 0.8800 for both end-2025 and end-2026, a view predicated on anticipated British pound weakness. The primary drivers for this bearish GBP outlook are significant UK fiscal and political uncertainties, particularly surrounding the upcoming autumn budget. Analysts at the bank anticipate that potential tax increases or a loosening of fiscal rules would prove negative for the currency, with leadership ambiguity at the Treasury and Prime Minister's office adding to the pressure. This forecast holds despite UBS adopting a less dovish monetary policy outlook for the Bank of England, which includes removing an expected rate cut in November 2025 and raising its 2026 terminal rate projection to 3.25%. The decision to maintain, rather than raise, the 0.8800 target is influenced by market positioning, as the short GBP/long EUR trade is described as "very consensus," suggesting the trade is crowded. For 2026, the bank's outlook is characterized as "more neutral," indicating the primary risks are concentrated in the medium term.

Key Decisions for Investors

• Investors should be aware that the short GBP/long EUR position is a crowded, consensus trade, which increases the risk of a sharp reversal or short squeeze on any positive UK political or fiscal developments.
• Monitor the UK's autumn budget closely, as announcements regarding tax policy and fiscal rules are flagged as the key catalysts expected to drive the next significant move in the pound.
• Note the divergence between the negative fiscal outlook and the less dovish Bank of England stance; if political risks recede, the market could refocus on the relatively supportive UK interest rate path, potentially strengthening GBP.
• Consider that the bearish thesis on the pound is primarily a medium-term view, as UBS's outlook shifts to "more neutral" for 2026, suggesting the rationale for short positions may weaken over a longer horizon.