UBS continues to express a constructive outlook for sterling even as it identifies notable vulnerabilities tied to the gilt market and the wider fiscal trajectory of the United Kingdom. In a recent note, the Swiss bank set identical targets for the euro-to-pound exchange rate - EUR/GBP at 0.8500 - for both the end of the third quarter and for year-end.
The forecast encapsulates UBS's view of how sterling is likely to perform against the euro in the months ahead. At the same time, the bank signalled that it will pay close attention to developments in the policy sphere over the coming weeks, citing the formation of the incoming government under Prime Minister Andy Burnham as a principal item to monitor.
UBS specifically acknowledged that pressures in the gilt market represent a risk to the pound. The bank also pointed to concerns about the broader fiscal outlook for the United Kingdom as another factor that could weigh on sterling. The combination of these issues underpins a cautious element to UBS's stance, even as the firm retains an overall constructive view.
In balancing its outlook, UBS framed its position as one that pairs a positive expectation for sterling with prudent vigilance, given the policy uncertainty accompanying the new government taking office. The note makes clear that the bank's exchange-rate targets are contingent on how policy and market conditions evolve in the near term.
Key points
- UBS projects EUR/GBP to reach 0.8500 at both end-Q3 and year-end, reflecting a constructive stance on sterling against the euro.
- The bank will closely monitor policy developments, naming the formation of incoming Prime Minister Andy Burnham's government as a central variable.
- Risks highlighted include volatility in the gilt market and uncertainty around the United Kingdom's broader fiscal outlook, which could affect fixed-income and currency markets.
Risks and uncertainties
- Gilt market pressures - identified as a direct risk to the pound and relevant to the fixed-income sector.
- Broader fiscal outlook in the United Kingdom - a source of uncertainty that could influence public finances and market confidence.
- Policy uncertainty tied to the incoming government - the process of government formation and subsequent policy moves may affect currency and bond markets.
UBS's note therefore combines a favourable view of sterling's prospects with an explicit caveat: near-term currency outcomes will depend on how gilt markets and fiscal policy evolve as the new government takes office.