UBS Sticks with GBP Preference Despite BoE Hold Call

Despite expectations that the Bank of England will hold interest rates steady for the rest of the year, UBS remains bullish on the British Pound (GBP) compared to the Euro (EUR). The GBP/EUR exchange rate has dipped slightly to around 1.1658, but UBS prefers the Pound's yield appeal.

The Swiss bank distinguishes between a currency's relative appeal and the likelihood of another interest-rate increase. In their view, 'we remain Neutral on the EUR and expect EURUSD to move back between 1.18-1.20', while GBP and NOK remain attractive due to their yield appeal.

This preference is based on the existing level of UK rates, rather than a forecast that the Bank of England will begin a fresh tightening cycle. The ECB is expected to hike once more in September to 2.5% before pausing, while the BoE will hold policy rates at 3.75% through year-end 2026.

This would leave Bank Rate 1.25 percentage points above the ECB rate, preserving a sizeable carry advantage for Sterling. However, investors have turned more hawkish than UBS's base case, pricing in roughly 32 basis points of BoE tightening by year-end, with a November increase judged almost 70% likely.