Mitsubishi UFG Says Bank of England Policy Expectations, U.K. Political Risks in Focus for Sterling

06:18 AM EST, 02/26/2026 (MT Newswires) -- Sterling (GBP) has strengthened at the start of this week, resulting in EUR/GBP falling back towards the 0.8700 level, after hitting a high last week of 0.8752, noted MUFG.

MUFG said sterling has derived some support from evidence of stronger United Kingdom growth momentum at the start of this year, as well as comments by Bank of England Governor Andrew Bailey, who didn't strongly signal that he was likely to vote for a cut at the next policy meeting in March.

When asked if he had seen enough further evidence to feel that he was confident to take that step and vote for a cut, MUFG noted the governor stated that "it's a genuinely open question at the moment." Bailey also expressed disappointment that services inflation didn't fall as much as hoped in the latest consumer price index report for January.

The U.K. rate market has moved to slightly scale back expectations for a rate cut next month, but is still pricing in around 18bps of cuts, wrote MUFG in a note to clients.

Political risks in the U.K. will also be in focus at the end of this week and could potentially have an impact on sterling's performance, noted MUFG.

The parliamentary by-election in Gorton and Denton is taking place on Thursday. Labour won in Gorton and Denton by a comfortable 37 percentage points margin in the parliamentary election just 19 months ago. However, the latest opinion polls have been indicating that it is a close three-way race to retain the seat. An Opinium poll put the Greens on 30% followed closely behind by Labour on 28% and Reform on 27%. A defeat for the Labour Party could increase pressure on Keir Starmer's position as prime minister and would add to Labour Party concerns over its sliding popularity ahead of the local elections in May,.

Manchester Mayor Andy Burnham was stopped from representing the Labour Party in the by-election. It would raise further questions over the judgment of the Labour leadership if the seat is lost, according to the bank. As a result, a defeat for Labour has the potential to trigger at least a temporary sell-off for sterling, noted MUFG.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.