UBS Forecasts Pound to Reach 1.38 Against Dollar by Year-End, Supported by UK Rate Hike Expectations and Short Covering

On October 30, UBS Group forecast that the British pound will rise to 1.38 against the US dollar by December this year, climb further to 1.39 by March 2027, and reach 1.41 in the second half of 2027.

UBS believes that UK economic data has continued to outperform market expectations, while speculative traders still hold substantial short positions in the pound. Should these positions be unwound in a concentrated manner, it could further drive the pound higher.

As of 19:38 Beijing time on the 30th, the pound was up 0.4% against the dollar at 1.3430, hitting a new high since October and on track for a third consecutive weekly gain.

On monetary policy, UBS expects the Bank of England to begin a new round of rate hikes starting next week and to raise rates further in the first quarter of 2027. Meanwhile, the market currently anticipates about three more rate hikes from the Federal Reserve, but UBS believes the actual number may be only two.

If the market lowers its expectations for the extent of future Fed rate hikes, the dollar could weaken further, thereby providing upward momentum for the pound.

However, UBS noted that if the US economy performs better than expected, or if the Fed raises rates more times than the bank forecasts, the pound's upside potential may be limited.