UBS posted a stable outlook for the economy on Tuesday rate with a slight downward trend for the pair, attributing its stability to similar monetary policy cycles between the Bank of England (BoE) and the European Central Bank (ECB).
UBS pointed out that the BoE’s decision to cut rates in August was limited, with a 5-4 vote among board members, suggesting future rate cuts could be gradual. The next rate cut is not expected until the BoE meeting in November.
It highlighted a key difference between the two central banks: UK interest rates are around 1 percentage point higher than those in the eurozone, giving the pound a carry advantage.
UBS expects this interest rate gap to persist over the forecast period, leading to a stronger pound against the euro in the coming quarters. However, the potential for the BoE to accelerate rate cuts prevents UBS from predicting even lower EUR/GBP rates.
In terms of investment considerations, UBS predicts that EUR/GBP will remain relatively within the range, with only a slightly lower spot rate expected in the near future. The GBP is believed to have some upside, barring significant policy changes.
UBS outlines the limits for the EUR/GBP and expects it to remain within the range of 0.835 to 0.875, a range it has maintained over the past twelve months.
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