MUFG Says Sterling Hit "Hard" by A Dovish Bank of England Policy Hold, Rising U.K. Political Risks

06:04 AM EST, 02/06/2026 (MT Newswires) -- Sterling (GBP) has weakened sharply over the last couple of trading days, said MUFG.

After closing below support from the 200-day moving average at the start of this week for the first time sine April of last year and hitting a low of 0.8613, EUR/GBP jumped to a high Thursday of 0.8721, wrote the bank in a note to clients. The abrupt reversal of the sterling strengthening trend that had been in place since late last year was triggered both by the dovish repricing of Bank of England rate cut expectations and the return of political risk in the United Kingdom.

The U.K. rate market has moved to price back in more rate cuts from the BoE after Thursday's Monetary Policy Committee meeting, stated MUFG. The timing of the next BoE rate cut has been brought forward to the next MPC meeting in March.

The U.K. rate market has moved to price in around 16bps of cuts by March, which compares with only around 5bps of cuts that were priced in before Thursday's MPC meeting, pointed out the bank. The dovish repricing was triggered by the surprisingly close decision to leave rates on hold Thursday by a 5-4 vote.

In addition, comments from Governor Andrew Bailey and MPC member Katherine Mann, who voted to leave rates on hold, indicated that they could vote for a rate cut at upcoming policy meetings.

Governor Bailey stated that "I think going into March, 50-50 is not a bad place to be. In a sense, markets are asking themselves the same question that I'm asking, or perhaps they're just working out what question I'm asking."

The dovish change in forward guidance from the BoE reflects less concern over persistent inflation risks. The BoE's forecasts for inflation and growth were both lowered, and the unemployment rate forecast raised. MUFG is currently forecasting two more cuts this year, but can't rule out a third later this year.

At the same time, sterling has come under renewed selling pressure on the back of fresh concerns over the political risks in the U.K., added the bank. Keir Starmer's position as prime minister is under greater scrutiny, again triggered by the latest revelations from the Epstein scandal.

Starmer's past decision to appoint Peter Mandelson as the U.K. ambassador to the United States is coming back to haunt him. According to the local media, potential leadership challenger Angela Rayner, former Deputy PM, is reportedly "ready" to launch a leadership campaign, which adds to downside risks for sterling according to MUFG.

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