The Pound to Euro (GBP/EUR) exchange rate briefly dipped to 3-week lows just below 1.1500 early this week before consolidating around 1.1540.
Following a series of very poor election results last week, the Pound dipped amid expectations of a challenge to Prime Minister Starmer.
At this stage, MUFG is backing a GBP/EUR slide to 1.13 at the end of this year, but if there is a lurch to the left by the Labour Party and a serious bond-market sell-off, the bank considers that GBP/EUR could slide further to at least 1.11.
Starmer remains determined to remain in office and, so far, there has been no official challenge. There are, however, strong expectations of a challenge with the risk of prolonged political uncertainty.
MUFG considers that the Pound is not in a good position to resist any politically-related selling pressure. Although the latest GDP data was stronger than expected, the bank expects that the Iran war and jump in energy prices will cause significant damage to the economy.
It expects that the Pound will already be vulnerable in these circumstances and any doubts over fiscal policy would increase the risk profile.
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