26th October 2016
The pound has already fallen to a 30-year low but may continue to fall, according to analysis by UBS Wealth Management. The wealth manager 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, if concerns over the future of the UK’s trade relationships continue to dominate, it predicts that GBPUSD could temporarily fall to the 1.10-1.20 range.
Geoffrey Yu, Head of the UK Investment Office at UBS Wealth Management, says: “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. 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.”
UBS Wealth Management also assessed the impact that the weaker pound is having on two further economic concerns: consumer resilience and the current account deficit.
Yu adds: “The UK economy has proved to be more resilient than many anticipated following the Brexit vote, with consumer sentiment in particular holding firm. 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.”
UBS Wealth Management believes that plugging the gap in the current account deficit will take more than currency adjustments. Yu says that 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.