"UBS Sees Pound Crumbling as Euro Gains Ground in Policy Divide"

UBS has reaffirmed its bearish stance on the British pound, maintaining a specific EUR/GBP target that underscores its pessimistic outlook on the currency. This projection is grounded in a comprehensive assessment of economic fundamentals, central bank policies, and persistent inflationary pressures. The bank expects the pound to weaken further against the euro, driven by divergent monetary policies between the Bank of England (BoE) and the European Central Bank (ECB), as well as broader economic challenges facing the UK.

The UBS EUR/GBP target implies a continued depreciation of the pound, with analysts pointing to a key threshold at around 0.88 EUR/GBP as a potential support level. This would represent a significant shift from the current exchange rate and signals a deepening of the pound's struggles in the forex market. The bank’s forecast is based on an analysis of inflation expectations, which have risen to five-month highs according to the BoE’s latest data. Inflation expectations for the next year reached 3.4%, up from 3.2% in July, while three-year expectations also climbed to 3.0%, compared to 2.8% in the previous month. These figures indicate that price pressures in the UK are not abating, despite previous attempts by the BoE to curb them through monetary tightening.

The divergence in interest rate trajectories between the UK and the Eurozone is also a critical factor in the pound’s bearish outlook. While the BoE has signaled a potential slowdown in its tightening cycle, the ECB has shown signs of maintaining a more hawkish stance, particularly in response to inflationary pressures across the Eurozone. This creates an environment where capital flows may favor the euro, putting further downward pressure on the pound. The BoE's cautious approach to easing, as noted by BBH analysts, suggests that rate cuts may be delayed or limited in scope, compounding the pound's challenges.

The pound’s recent performance in the foreign exchange market reflects these underlying concerns. On Tuesday, the currency fell to four-week lows against the euro, U.S. dollar, and Swiss franc, trading at 0.8701, 1.3375, and 1.0759 respectively. These levels indicate a broad-based weakening of the pound across major currencies. If the downtrend continues, key support levels are expected to be tested, including 0.88 against the euro, 1.31 against the dollar, and 1.06 against the Swiss franc. Such movements would validate UBS’s bearish outlook and could trigger further depreciation.

From a market perspective, the bearish forecast for the pound has significant implications for traders, businesses, and investors. For currency traders, the EUR/GBP pair presents potential opportunities for shorting the pound or long positions on the euro, particularly as UBS’s target aligns with technical indicators suggesting an upward trend in the pair. Businesses with exposure to the Eurozone may face rising costs for imports, while UK exporters could benefit from increased competitiveness in European markets. Investors, meanwhile, must carefully assess the risks associated with a weaker pound, especially when holding UK-denominated assets or considering cross-border investments.

In conclusion, UBS’s bearish pound forecast is supported by a confluence of macroeconomic and policy-related factors, including elevated inflation expectations, slower UK growth, and divergent central bank strategies. These elements create a challenging environment for the pound and reinforce the bank’s EUR/GBP target. As the BoE and ECB continue to navigate their respective monetary paths, the pound’s trajectory will remain closely tied to these developments, making UBS’s outlook a critical consideration for market participants.

Source: [1] UBS Bearish Pound Forecast (https://bitcoinworld.co.in/ubs-bearish-pound-forecast/) [2] Pound Slides Against Majors (https://www.rttnews.com/3570793/pound-slides-against-majors.aspx) [3] GBP Holds Firm as Inflation Expectations Rise – BBH (https://www.fxstreet.com/news/gbp-holds-firm-as-inflation-expectations-rise-bbh-202509041043)