Sterling Set to Strengthen Further, UBS Cites Yield Advantage

Sterling Poised for Further Strength

UBS forecasts Sterling to strengthen in the coming months, stabilizing after robust gains in June and July. The Swiss bank highlights the pound's significant yield advantage over the euro, robust economic indicators, and an anticipated unwinding of short positions as key drivers. UBS projects the EUR/GBP pair will drift towards 0.84.

Current Market Landscape

Sterling has maintained stability since mid-July. UBS notes the ongoing search for yield heavily favors the pound, which offers approximately 1.5 percentage points higher yield than the euro. This advantage, coupled with recent stronger UK economic data and a gradual fading of oil price impacts, underpins the currency's positive outlook. Markets have also shown confidence that upcoming fiscal plans will not destabilize the economy.

Economic and Market Implications

The notable yield advantage positions Sterling for stronger total returns. UBS anticipates a significant unwinding of still substantial short positions in the currency, providing further support. While not bearish on the euro, UBS believes much of the positive news, including expectations of stronger growth from fiscal support and a final European Central Bank rate hike in September, is already priced in. The bank expects the September hike to conclude the tightening cycle.

Conclusion

Markets will closely scrutinize statements as the November budget approaches, with members of parliament returning to discuss potential fiscal packages. UK politics remains a critical risk; sentiment could reverse swiftly if new Prime Minister Andy Burnham’s initial announcements are viewed as fiscally imprudent. A stronger-than-expected recovery in the European economy also poses a risk, potentially pushing the EUR/GBP pair above 0.86.

FAQ

Q: Why does UBS expect Sterling to strengthen?

A: UBS cites Sterling's yield advantage over the euro, stronger UK economic data, and the potential unwinding of substantial short positions.

Q: What is the forecast for EUR/GBP?

A: UBS expects the EUR/GBP pair to drift towards 0.84 before stabilizing around 0.85 by September 2027.

Q: What are the main risks to Sterling's outlook?

A: Key risks include UK political developments, particularly fiscal announcements, and a stronger-than-expected recovery in the European economy.

Source: Investing.com