UBS suggested today the pound could hit US$1.30 by the end of the year and predicted further strength into next year.
The bank has raised its GBPUSD forecast to US$1.24 (from US$1.23) for end-June and thinks the pound will strengthen further to US$1.30 by the end of the year. It sees the rally in sterling continuing into 2024 forecasting US$1.33 by end-March next year.
UBS believes “that the fair value for GBPUSD is closer to the 1.50 level.”
“Thus, even if the currency pair were to move to 1.30, the pound would still look undervalued, in our view.”
The US dollar is gaining currently as investors re-position for a prolonged rate hike cycle in the US but UBS thinks this is a temporary phenomenon and will change in the second half of the year.
Although in the near term, UBS expects cable to explore its lows it sees this as a good opportunity to build up positions.
UBS pointed out the economic outlook for the UK has seen a marked improvement, benefiting from lower energy prices amid a healthier fiscal position, and from improving global economic growth.
After a period of ongoing downgrades, economists are turning more positive on the economic outlook for this year.
But the economic challenges remain. The Bank of England is still in a dilemma, balancing an improving growth backdrop against a backdrop where still-high inflation is likely to fall a little quicker.
“As long as this situation persists, we think GBPUSD rallies will remain short lived.”
But looking into the second half of the year, “we expect the US dollar to see a new bout of weakness.”
“When investors have clarity on the end of the US interest rate hiking cycle, they are likely to position for rate cuts.”
The broker added a mild recession may hit the US, which could also encourage further selling of the USD.Today, the pound has moved 0.25% higher versus the dollar but remains below US$1.20, at US$1.1976.