Currency analysts at MUFG predict the Euro to recover ground against the Pound Sterling over the coming months, forecasting the Euro-Pound rate will strengthen to 0.8700 as Sterling’s recent rally fades and UK political optimism proves difficult to sustain.

The Euro to Pound exchange rate (EUR/GBP) traded close to 0.85 on Monday after falling to its lowest levels of 2026, leaving the Pound at its strongest against the Euro this year, but MUFG believes the move has gone too far.

The Pound has outperformed most major currencies this month after political developments in the UK boosted investor confidence. Reports that incoming Prime Minister Andy Burnham is likely to appoint a fiscally conservative Chancellor have also helped reduce concerns over the government’s economic direction.

MUFG believes those political tailwinds have been an important driver of Sterling’s gains, but questions whether they can continue.

“The pound has continued to trade at stronger levels after strengthening sharply in response to media reports surrounding the new government.”

The bank argues that markets have already priced in much of the near-term political optimism.

“We are cautious about chasing Sterling strength from current levels.”

MUFG also notes that the Euro has been weighed down by higher energy prices and concerns over the regional growth outlook following tensions in the Middle East. However, it expects those headwinds to fade gradually as markets refocus on relative valuations.

“The recent move in EUR/GBP looks overextended.”

While MUFG acknowledges that the Bank of England is likely to keep policy relatively restrictive in the near term, it believes expectations for UK growth and fiscal policy have become increasingly optimistic.

“Current market pricing leaves room for EUR/GBP to recover.”

Near-Term EUR/GBP Forecast: MUFG Sees Recovery Towards 0.8700

MUFG continues to forecast EUR/GBP rising to 0.8700, implying the Pound will surrender part of its recent gains against the Euro.

“We forecast EUR/GBP at 0.8700.”

The bank believes the combination of fading political optimism in the UK, stretched Sterling positioning and a stabilisation in the Eurozone outlook should allow the Euro to recover over the coming months. While the Pound could remain supported in the very near term, MUFG expects gains beyond current levels to prove increasingly difficult to sustain.