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Investing.com -- UBS has adjusted its forecast for the pound sterling, setting a new end-Q3 target of 0.8700 for the EUR/GBP exchange rate after meeting its previous end-Q2 target of 0.8600.
The bank maintains its year-end target of 0.8800, with an expected trading range between 0.8450 and 0.8800.
UBS attributes its bearish outlook on the pound to ongoing challenges in the U.K. fiscal landscape, as the Labour government struggles to balance its fiscal rules while avoiding new taxes.
Recent developments have reinforced UBS’s position, with Prime Minister Starmer agreeing to dilute planned cuts to winter fuel allowances and disability benefits following a backbench revolt.
This political pressure has pushed U.K. long-term bond yields higher and placed Chancellor Reeves in a difficult position ahead of the Autumn budget statement expected in late October or early November.
The Office for Budget Responsibility (OBR) has further complicated matters by releasing a report warning about the U.K.’s vulnerable fiscal path.
The report highlighted that changes in pensions could eliminate a significant natural buyer of gilts from the market in coming decades, potentially forcing more shorter-dated issuance and raising interest costs.
UBS economists expect the Bank of England’s base rate to be cut to 3.00% by the end of 2026, creating a compressing rate differential that will need to be priced in.
The bank notes this framework keeps the pound heavily dependent on "hot money" flows linked to its carry premium, and indicates it is "biased asymmetrically towards even higher EURGBP rates" than its official forecasts suggest.