Investing.com – Sterling has struggled of late, weighed by concerns surrounding the UK’s financial position. UBS sees the potential for further losses near term, but thinks the fiscal concerns are undone and gains are likely later in the year.
At 06:15 ET (11:15 GMT), GBP/USD rose 0.2% to $1.2201, but has dropped over 3% over the last month in the wake of the UK gilts turmoil as yields soared.
The recent rise in UK gilt yields has been compared in the media with the “Truss moment”, when Liz Truss became the UK’s shortest-serving PM as she was forced to resign after just 49 days in office when borrowing costs soared in the aftermath of her government’s mini-budget.
However, UBS maintains that comparisons to the 2022 “Truss saga” are overdone.
“We do not expect the recent market wobbles in the UK to result in a situation comparable to the 2022 turmoil. Pension regulations are in a better place and policymakers are (hopefully) well aware of the risks,” analysts at the Swiss bank added, in a note dated Jan. 17.
With major risks lined up in the coming weeks that could push US yields even higher, the bank cannot rule out GBP/USD breaking below $1.20.
However, this is not our base case and while we like selling EUR/GBP upside, we prefer to remain on the sidelines in GBP/USD for the time being, as we are particularly wary of Trump inauguration risks.
“We expect GBP/USD to recover losses later in the year as we see USD strength waning, but it will take some time and potentially pain to get there,” UBS added.
The Swiss bank sees GBP/USD climbing to $1.29 by the year’s end.
