The British pound is poised to extend gains against the euro as investors price in a widening yield differential and reduced political risk premium, UBS said on Friday.
Sterling currently offers roughly 1.5 percentage points more in yield than the euro, the highest margin in Europe alongside the Norwegian krone, according to the Swiss bank. UBS projects the EUR/GBP exchange rate will gradually decline to 0.84 before stabilizing near 0.85 by September 2027. A stronger-than-expected rebound in the European economy could push the pair above 0.86.
Sterling’s recent strength follows a period of appreciation in June and July, after which it has held steady since mid-July. Analysts attribute the resilience to firmer UK economic data, diminishing pressure from oil prices, and expectations that upcoming fiscal measures will not disrupt markets. This backdrop is expected to encourage the unwinding of substantial short positions in the currency.
UBS also noted that sterling’s stability since mid-July coincided with markets granting Prime Minister Andy Burnham a period of cautious optimism during the summer lull. However, the bank warned that UK politics remains the primary risk, with sentiment vulnerable to rapid shifts if Burnham’s early policy signals are perceived as fiscally imprudent.
Looking ahead, the European Central Bank is expected to deliver its final interest rate hike in September, which UBS views as the conclusion of the current tightening cycle. The UK budget, slated for November following the parliamentary recess, will be a key focus for fiscal policy direction and market reaction.
The pound’s yield advantage and the ECB’s policy trajectory reinforce expectations of further sterling appreciation, though political developments in London could alter the trajectory.
