Investing.com — The British pound is likely to remain under pressure against the US dollar in the near term, with analysts lowering their June forecast to 1.34, according to a report from UBS Chief Investment Office published on Friday.
The dollar has benefited from safe-haven demand amid escalating US-Iran tensions and elevated oil prices, while sterling faces headwinds from UK political uncertainty ahead of May elections and concerns about growth.
The US, as a net energy exporter, stands to benefit from higher energy prices, while the UK still faces inflationary spillovers despite being less exposed than the Eurozone.
Recent inflationary pressures from higher oil prices have led markets to price out Bank of England rate cuts and even consider hikes. The BoE adopted a hawkish tone at its most recent meeting, with a unanimous 9-0 vote to hold rates steady. The central bank also acknowledged recent softness in domestic activity.
UBS analysts Constantin Bolz and Clémence Dumoncel said these market expectations for rate hikes are overdone. The firm continues to expect easing later this year, though not before November.
In the meantime, the pound should continue to receive moderate support from its attractive carry in a G10 currency context.
The report’s base case assumes the Iran conflict will be short-lived and oil prices will ease by June, which should reduce upward pressure on the dollar. In the near term, the US’s stronger cyclical position and safe-haven flows are likely to keep under pressure, with the next support level near the November lows of 1.30.
As UK political risks recede after the elections and the BoE nears the end of its easing cycle, UBS expects GBPUSD to recover gradually. The pound’s current undervaluation, combined with firmer growth data, should support a medium-term rebound toward 1.40.
UBS forecasts GBPUSD at 1.34 for June, 1.37 for September, and 1.40 for December and March 2027. The firm noted that resistance stands around 1.35, with stronger resistance around recent highs of 1.37-1.38.
Key risks include further escalation in global tensions, a more hawkish Federal Reserve or more dovish BoE, which could push GBPUSD into a 1.25-1.30 range. A quicker resolution to the Iran conflict, more clarity on UK politics, and a more hawkish BoE could accelerate a pound recovery and push the pairing quicker to 1.40.
UBS has also reduced its near-term forecast for the euro-pound exchange rate to 0.86, citing the British pound’s relative resilience compared to the euro amid ongoing energy market volatility.
Both currencies have faced pressure from energy market dynamics, but the impact has been less severe for sterling due to the UK’s relatively lower energy vulnerability.
The bank noted that sterling is likely to remain under pressure in the near term ahead of the May local elections. UBS recommends waiting for clarity around the UK election before engaging in short positions, though it sees value in selling GBP downside risks for a yield pickup given expected volatility around the May election.
Europe’s economic recovery is gaining traction, supported by increased fiscal spending, but much of the fiscal and monetary support is already priced into the euro, limiting further upside, according to UBS. Higher energy prices pose a meaningful risk to Europe’s recovery and could price out some positive expectations for the EUR.
The 0.86 level serves as a key support in the near term, which UBS expects to be broken and then form the new equilibrium. The next support stands at 0.84-0.85, while resistance is seen around 0.88-0.89.