UBS Holds Positive Sterling Outlook Despite UK Fiscal and Gilt Market Risks

UBS continues to hold a constructive outlook on the British pound, even as it identifies potential risks from the UK's fiscal policy and government bond market, according to a recent research note from the Swiss bank.

Sterling Forecast Maintained

UBS is targeting a EUR/GBP exchange rate of 0.8500 for both the end of the third quarter and the end of 2026. This forecast reflects the firm's expectation for sterling's performance against the euro over the coming months.

The bank's position balances a generally positive view on the currency with a cautious approach to emerging political and economic factors in the United Kingdom.

Fiscal and Market Risks on the Radar

Analysts at UBS acknowledged specific headwinds that could pose a risk to their sterling forecast. The note highlights two primary areas of concern:

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• The gilt market: Potential volatility or adverse movements in UK government bonds are being monitored as a source of risk for the pound.
• The fiscal outlook: The broader fiscal condition and policy direction of the UK government remain a key variable for currency stability.

Focus on New Government Policy

The firm stated it will be closely watching policy developments as a new government takes office. The note specifically cited the formation of incoming Prime Minister Andy Burnham’s government as a key event to monitor.

This wait-and-see approach indicates that while the bank's baseline forecast is positive, future policy decisions from the new administration will be critical in shaping the pound's trajectory.