After hitting 4-year highs above 1.3800 in late January, the Pound to Dollar (GBP/USD) exchange rate dipped sharply to lows near 1.3500 before trading around 1.3670.
Both the Pound and dollar are vulnerable to elevated risk premiums, but UBS considers that UK vulnerability will hold GBP/USD to 1.35 at the end of this year.
Overall, UBS considers that the fundamentals will drag the dollar lower, especially with increased speculation that global investors will shift their asset allocations away from the US.
There is also scope for further Fed interest rate cuts. Nevertheless, on a near-term view, the bank considers that investors may be pricing in a slightly higher risk premium on the dollar than is justified.
UBS notes that the risk premium on the Pound dipped sharply after the November budget with reduced fears over the fiscal outlook.
The bank considers that this optimism was overdone and the Pound has been subjected to renewed pressure during the past week with Prime Minister Starmer under strong pressure due to the Mandelson scandal. If he is forced to resign, fiscal fears will intensify again.
UBS forecasts suggest that, given these concerns, GBP/USD will find it difficult to trade above 1.40.
