US dollar ‘structural downtrend’ set to benefit pound says UBS
UBS has said investors should expect strengthening of the pound against the US dollar over the next year as fears grow over the American currency’s “fragility.”
The pound has surged almost 10 per cent against the US dollar since its recent low in mid-January, now sitting at $1.33.
However, UBS analysts expect the surge to continue towards $1.39, with a year-end target of $1.40.
Despite positive news emerging about potential trade deals, the US is making to repair the damage done by President Donald Trump’s tariffs, the dollar has failed to bounce back.
“With a traditional rule of markets being that if something can’t rally on good news then it can really fall hard on bad, this price action leads us to stick with our established view that the US dollar is already in a structural downtrend,” added UBS strategist Shahab Jalinoos.
The fact that the euro failed to dip against the dollar after German Chancellor Merz needed an unprecedented second round of voting to receive parliamentary approval provided “more evidence” as to a broader drift away from the currency, UBS analysts added.
But while the dollar has continued to drop against most major currencies, the losses have not been evenly distributed.
“US dollar weakness has been quick and broad based, but not all currencies have appreciated meaningfully versus the dollar since the beginning of April,” noted the UBS analysts.
“Highly pro-growth currencies in the G10, like the Norwegian Krone, the Australian dollar, and the British pound, have been laggards,” they added.
This should also benefit the pound against the euro, as it catches up against the continent’s currency against the dollar.
The Swiss bank has now forecast that the pound will likely surge further against the euro “as the Bank of England is likely to cut rates less (75 basis points this year) than what the market is expecting.”
“The initial underperformance of the pound versus the euro started to reverse with financial markets calming down,” the analysts noted, expecting the value of the euro to fall to 84p from 85p.