UBS sees GBP/USD exchange rate moving toward 1.38

UK labor market data revealed a rise in jobless claims and the unemployment rate, alongside slower wage growth, potentially influencing the Bank of England's (BoE) monetary policy. UBS anticipates the BoE will hold rates steady at next week's meeting, but the soft labor data increases the likelihood of a 25 basis point rate cut in August. Despite persistent inflation, UBS forecasts that elevated interest rates will continue to support the British pound, projecting GBP/USD to reach 1.38 in the second half of the year.

Analysis

The UK labor market is exhibiting clear signs of weakening, evidenced by an increase in jobless claims and the unemployment rate reaching its highest point since the pandemic. Concurrently, wage growth has decelerated more than anticipated, a development that could lessen the impetus for the Bank of England (BoE) to sustain its current high interest rate stance. Investment bank UBS projects no alteration to interest rates at the BoE's upcoming meeting but suggests the softer labor market data elevates the probability of a 25 basis point rate reduction in August. However, persistent inflationary pressures, with core CPI at 3.8% year-over-year and services CPI at 5.4% year-over-year as of April, remain a significant concern, potentially delaying any immediate monetary easing as May's inflation figures may not show sufficient improvement. Despite these headwinds, UBS anticipates that elevated interest rates will continue to bolster the British pound in the short term, forecasting the GBP/USD exchange rate to appreciate towards 1.38 in the latter half of the year and potentially higher in early 2026, assuming no adverse fiscal events or a more severe global economic downturn.

Key Decisions for Investors

• Investors should monitor upcoming UK inflation data closely, particularly the May figures, as this will be a critical input for the Bank of England's decision on a potential August rate cut.
• Consider the implications of a potential BoE rate cut in August for positioning in UK assets, while acknowledging that persistent inflation presents a counterbalancing risk to a swift policy pivot.
• Evaluate currency exposure in light of UBS's forecast for GBP/USD to reach 1.38 in H2 2024, but remain cognizant of downside risks stemming from potential fiscal instability or a broader global economic slowdown.