SKN | UBS Sees Further Sterling Appreciation as Short Positions and Interest-Rate Expectations Support the Pound

Key Takeaways:

• UBS forecasts sterling at $1.38 by December 2026, with further appreciation toward $1.39 by March 2027 and $1.41 in the second half of 2027.
• The bank identifies heavily short sterling positioning, stronger-than-expected UK economic data and anticipated Bank of England rate increases as potential drivers of further gains.
• UBS expects two additional Federal Reserve rate increases, fewer than the approximately three currently reflected in market pricing, creating potential pressure on the US dollar if expectations adjust.

UBS expects the British pound to strengthen further against the US dollar, identifying market positioning and diverging monetary policy expectations as important drivers of its outlook. In its latest foreign-exchange assessment, the bank projected sterling could reach $1.38 by December 2026, with additional appreciation expected through 2027. The forecast reflects UBS’s assessment that UK economic performance and prospective interest-rate increases could provide support for the currency while changing expectations for US monetary policy may weigh on the dollar.

UBS Identifies Sterling Positioning as a Source of Upside

UBS noted that futures positioning among traders remains strongly short on sterling, meaning market participants have accumulated substantial bets against the currency. The bank believes this positioning leaves room for further appreciation if economic developments or monetary policy expectations force investors to reconsider those positions.

Sterling traded around $1.3430 on October 30, gaining 0.40% during the reported session. The pound was also approaching its third consecutive weekly advance, having risen from $1.3235 on October 9 to $1.3373 on October 23. UBS identified $1.38 as an initial resistance level, followed by $1.40 to $1.41. On the downside, it identified support around $1.33 and then $1.32.

Bank of England Expectations Support the Currency Outlook

Another central element of UBS’s forecast is its expectation that the Bank of England will begin a short series of interest-rate increases, starting as early as the following week, with another increase anticipated in the first quarter of 2027.

The bank attributed this expectation partly to UK economic data continuing to outperform forecasts. Higher interest-rate expectations can support a currency by improving its relative yield appeal, although the extent of that support depends on how monetary policy develops compared with other major economies.

Federal Reserve Policy Creates a Potential Dollar Headwind

UBS also highlighted a difference between its Federal Reserve outlook and market expectations. Following the Fed’s decision to maintain interest rates at 3.75% to 4%, the bank said markets were pricing approximately three additional rate increases, compared with its own forecast of two.

If US rate expectations decline toward UBS’s projections, the adjustment could weaken the dollar and provide further support for sterling. However, the bank identified stronger US economic growth or more Federal Reserve increases than anticipated as key risks to its currency forecast.

Euro Outlook Reflects Separate Political and Monetary Risks

UBS also expects the euro to remain relatively stable against sterling, initially around £0.84 before moving toward £0.85 in subsequent quarters. The bank identified £0.8350 as a significant support level and £0.8620 as resistance. The euro recently traded at £0.8339, below the identified support level.

According to UBS, concerns surrounding France’s budget and public finances have weighed on the euro. The bank sees potential for recovery in 2027 if France passes a budget by year-end. It also expects the European Central Bank to raise interest rates in December, while anticipating limited currency impact from President Christine Lagarde’s announcement that she will step down early.

For internationally exposed investors and families managing assets across multiple currencies, UBS’s assessment highlights the importance of monitoring relative interest-rate expectations, political developments and currency positioning. The bank’s sterling projections remain conditional rather than assured, with US economic strength and Federal Reserve policy representing significant variables. Developments in the coming months will determine whether the expected divergence between UK and US monetary policy translates into sustained currency appreciation.

For a confidential discussion regarding your cross-border banking structure and global wealth management arrangements, contact our senior advisory team.