Pound Sterling Institutional Forecast: Why UBS Remains Bullish On GBP

The Pound has held up better than many expected in recent weeks despite political upheaval in the UK and the conflict in the Middle East, with UBS arguing that supportive fundamentals continue to underpin Sterling.

GBP/USD traded near 1.3200, while EUR/GBP remained around 0.8670, close to the middle of this year’s trading range.

UBS: Sterling Has Strong Underlying Support

UBS says the Pound’s resilience reflects both confidence in the UK’s fiscal framework and supportive domestic fundamentals.

“Sterling has proven resilient in the face of both the conflict in the Middle East and political developments at home.”

The bank notes that Andy Burnham’s commitment to existing fiscal rules, together with appointments of experienced economic advisers, has helped reassure markets.

UBS also highlights the UK’s improving balance of payments, supported by portfolio inflows and strong merger and acquisition activity, as an important structural support for Sterling.

Less Hawkish BoE Not Necessarily Bad for GBP

Although markets have scaled back expectations for Bank of England rate hikes, UBS argues that this does not automatically weaken the Pound.

“We don’t see the recent pricing out of hikes as necessarily a negative for GBP.”

The bank believes lower energy prices, moderating wage growth and easing inflation reduce the risk of a policy mistake by the BoE, while relatively attractive UK front-end yields continue to support Sterling.

UBS also notes that the Pound remains one of the most attractive carry currencies in the G10 universe while market volatility stays subdued.

“The key risks to our constructive GBP view are a shift in the fiscal narrative, a perceived policy mistake from the BoE, and a move to a broader risk-off environment.”