UBS sees further upside potential for the pound, GBP/USD target revelead

UBS analysis indicates the British pound's recent strength against the U.S. dollar is primarily due to broad dollar weakness rather than inherent sterling momentum, despite a slowing UK labor market. The firm forecasts only two additional 25 basis point Bank of England rate cuts by year-end, which should create attractive GBP carry opportunities, particularly CHF-funded trades. While targeting GBP/USD at 1.40 long-term, UBS warns of a potential positioning-driven setback, suggesting a retreat to 1.36 as a hedging opportunity, and also identifies upside potential for NOK and SEK against GBP over a 6-12 month horizon.

Analysis

According to UBS analysis, the British pound's recent appreciation against the U.S. dollar is primarily a function of broad dollar weakness rather than inherent sterling strength, a view supported by the modest movement in the EUR/GBP pair. Despite data indicating a slowing UK labor market, the Bank of England is expected to pursue a gradual monetary easing path due to elevated inflation, with UBS forecasting only two additional 25 basis point rate cuts by year-end. This policy trajectory is anticipated to create attractive carry opportunities for the pound, with the firm specifically highlighting CHF-funded GBP long positions as favorable due to the significant interest rate differential. While UBS maintains a long-term target of 1.40 for GBP/USD, it cautions that the recent rally increases the risk of a positioning-driven setback. Such a retreat, particularly towards the 1.36 level, would be viewed as an opportunity to hedge USD positions. Over a six to twelve-month horizon, UBS identifies relative value opportunities in other European currencies, forecasting upside potential for the Norwegian krone and Swedish krona against the pound, and recommends selling upside risk in GBP/NOK above 14.10 for yield enhancement.

Key Decisions for Investors

• Investors could consider establishing long GBP positions against lower-yielding currencies like the Swiss franc (CHF) to capitalize on the attractive carry trade potential, which is supported by the Bank of England's expected slow pace of rate cuts.
• For those with a bullish long-term view on GBP/USD, a positioning-driven dip towards the 1.36 level could present a strategic entry point or an opportunity to hedge existing U.S. dollar exposure.
• Consider diversifying sterling risk over a 6-12 month horizon by exploring potential long positions in the Norwegian krone or Swedish krona against the pound, or by implementing yield-enhancement strategies like selling GBP/NOK call options with strikes above 14.10.
• Monitor UK inflation and labor market data closely, as any significant deviation from current trends could alter the Bank of England's policy path and impact the viability of GBP carry trades.