UBS is forecasting that sterling could improve against the dollar over the next 12 months to $1.36 as the economy recovers from the initial shock of Brexit uncertainty later next year.
However, the firm warned that if concerns over the future of the UK’s trade relationships continue to dominate, the pound could temporarily fall to as low as $1.10 - $1.20.
“We expect the UK economy to bear the brunt of Brexit uncertainty in the coming months, levelling out as we move further into next year,” said Geoffrey Yu, head of the UK investment office at UBS Wealth Management. “Though the pound should recover accordingly, we cannot underestimate the central role that politics has played in sterling’s fate up until now. With the terms and conditions of the UK’s future trade links still unclear it is too early to rule out further downside risks in sterling.”
The wealth management business also assessed the impact that the weaker pound is having on consumer resilience and the current account deficit.
“The UK economy has proved to be more resilient than many anticipated following the Brexit vote, with consumer sentiment in particular holding firm,” Yu said. “Indeed, we expect the Bank of England to bump up its forecasts for GDP growth in November. But a weaker currency leads to rising prices, and it is households who will feel the pinch if higher inflation eats into incomes,” he added.
Yu believes that ‘plugging the gap in the current account deficit’ will take more than currency adjustments. It will take a couple of quarters for the economy to adapt to the lower pound and the impact on the current account deficit to be truly felt,” Yu said.