Sterling has faced recent struggles, weighed down by concerns over the UK’s financial position. UBS acknowledges the potential for further near-term losses but believes fiscal concerns are overstated, with gains likely later in the year.
As of 06:15 ET (11:15 GMT), GBP/USD was up 0.2% at $1.2201, though the pair has dropped over 3% in the past month amid turmoil in UK gilt markets, with yields surging.
Media comparisons have drawn parallels between the recent rise in gilt yields and the “Truss moment,” referring to the period when Liz Truss resigned as the UK’s shortest-serving Prime Minister after borrowing costs spiked following her government’s mini-budget.
UBS, however, argues these comparisons are exaggerated.
“We do not anticipate the recent market instability in the UK to lead to a situation akin to the 2022 turmoil. Pension regulations are more robust, and policymakers are (hopefully) better attuned to the risks,” the Swiss bank’s analysts stated in a note dated January 17.
While major risks in the coming weeks could push US yields higher, UBS does not rule out the possibility of GBP/USD slipping below $1.20.
That said, this is not their base case. The bank favors selling EUR/GBP on the upside but remains cautious about GBP/USD, citing particular concerns over risks surrounding the US political landscape.
“We expect GBP/USD to recover losses later in the year as USD strength diminishes, though this recovery may involve some volatility and challenges,” UBS concluded, projecting the pair to reach $1.29 by year-end.
