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Investing.com - The British pound extended gains against the U.S. dollar, primarily due to broad dollar weakness rather than specific strength in the pound, according to UBS analysis.
The modest upward movement in the EUR/GBP pair supports this assessment, indicating the pound’s rise is more about dollar dynamics than inherent sterling strength. Recent UK economic data points to a slowing labor market, though UBS believes the Bank of England will maintain its gradual approach to monetary policy easing with inflation still elevated.
UBS forecasts only two additional 25 basis point rate cuts from the Bank of England by year-end, which should create attractive carry opportunities for the pound against several peer currencies. The firm specifically highlights CHF-funded GBP carry trades as favorable given the interest rate differential between the currencies.
Against the U.S. dollar, UBS sees further upside potential for the pound despite the recent rally, targeting 1.40 at the end of its forecast horizon. However, the analysis warns that the latest GBP/USD rally increases the risk of a positioning-driven setback, which UBS would view as an opportunity to hedge USD positions if the pair retreats toward 1.36.
On a six to twelve-month horizon, UBS identifies upside potential in other European risk proxies like the Norwegian krone and Swedish krona against the pound, while also recommending selling upside risks in GBP/NOK above 14.10 for yield enhancement over the next one to three months.
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