GBP/USD Forecast: UBS Sees Pound at $1.38 by End-2026
Pound Sterling is gaining against the US Dollar as UBS sees scope for a BoE-driven recovery, though Goldman expects cautious guidance on further hikes.
Pound Sterling climbed against the US Dollar on Monday, taking the Pound to Dollar exchange rate to $1.3420, up 0.26% on the day.
Pound to Dollar (GBP/USD): 1.340932 (+0.15%)
Dollar to Yen (USD/JPY): 157.91103 (+0.21%)
UBS retains a $1.38 forecast for December 2026, supported by stronger UK economic data and investors’ substantial bets against Pound Sterling.
The bank expects a hawkish Bank of England rate increase to help reverse some of those positions, but Goldman Sachs sees a less decisive message accompanying the same policy move.
That disagreement makes the guidance at Thursday’s BoE meeting on 5 November important for the currency, even if the expected rise from 3.75% to 4% is delivered.
A rate rise could force investors to reconsider
UBS’s Constantin Bolz and Maelle Quillevere write: “Recent UK economic data reinforce our constructive view, with surprises continuing to come in on the upside. At the same time, speculative futures positioning in the GBP remains strongly short.”
Investors positioned for losses may need to buy back Pound Sterling if the economy and policy outlook continue to undermine their view.
For UBS, the BoE could supply that catalyst: “The combination of resilient fundamentals and bearish positioning leaves considerable scope for short covering if the BoE validates expectations for further tightening.”
Its forecast extends beyond a single insurance increase: “With underlying inflation pressures remaining elevated and UK economic activity proving more resilient than anticipated, we expect the BoE to deliver a hawkish hike and follow up with another increase in the first quarter of 2027.”
Goldman expects more tightening, but a guarded message
Goldman Sachs has itself added a February 2027 rate rise to its forecast.
Economists James Moberly and Sven Jari Stehn write: “We now expect a second Bank Rate hike to 4.25% in February given continued upward pressure on energy prices and the stronger recent activity and labour market figures.”
That leaves a gap between Goldman’s own rate forecast and the path it expects officials to endorse publicly this week.
“But we expect the guidance to reiterate that the MPC stands ready to act as necessary to return inflation to target rather than giving a strong steer on the path ahead.”
The economists also question the scale of tightening investors had anticipated in the market pricing they assessed:
“But we continue to think that market pricing for over 100bp of tightening over the next year looks too high given that second-round effects into wages look contained and consumer spending growth is likely to slow over the winter.”
One hundred basis points is equivalent to four quarter-point increases, substantially more than Goldman’s two-hike baseline.
Its caution reinforces the earlier warning that BoE guidance could test the post-Budget Pound recovery.
HSBC Asset Management takes a firmer view of the eventual rate level, expecting Bank Rate to move towards 4.50% in the first half of 2027.
US expectations and fiscal confidence also matter
UBS judged pricing for around three further Fed increases to be excessive relative to its own expectation of two, after last week’s decision to hold rates.
“With USD positioning remaining stretched on the long side, a moderation in US rate expectations could weigh on the dollar.”
Fiscal credibility remains a qualification, however, even after the Budget avoided a major adverse surprise.
UBS writes: “While the government still met its fiscal rules, limited fiscal headroom and the back-loaded nature of the planned consolidation mean credibility concerns have not disappeared.”
The Office for Budget Responsibility projects a £15 billion margin against the current-budget rule in 2029-30, leaving limited room for disappointments in growth, revenues or spending.
That is forecast compliance with a future rule, rather than a cash surplus already secured.
On the extra compensation investors demand for UK-specific risks, UBS says: “However, we expect the UK-specific risk premium that is currently embedded in markets to come down gradually.”
What This Means for GBP/USD
Thursday’s decision will test whether the BoE offers enough encouragement to bring investors betting against Pound Sterling back into the market as buyers. UBS’s recovery case is stronger if the rate increase comes with a clear willingness to tighten again.
Goldman’s expected cautious guidance leaves room for disappointment even with Bank Rate at 4%. If markets reduce their expectations for later increases, the currency may struggle to build on Monday’s gains.
The US outlook remains equally relevant to the $1.38 December forecast. Further strong US data that sustain aggressive Fed expectations would make Dollar weakness harder to achieve, leaving more of the recovery dependent on UK developments.
