Why UBS Sees the Pound Holding Up Through Political Noise

The pound has held its ground better than many expected over the past few weeks. Political turmoil in the UK and the conflict in the Middle East have not knocked it off course. UBS, for its part, argues that the currency's fundamentals remain supportive.

GBP/USD traded near 1.3200 on Friday. EUR/GBP hovered around 0.8670, close to the middle of this year's range. The Swiss bank's currency strategists said in a note that Sterling's resilience reflects a combination of factors: the Bank of England's relatively hawkish stance, a current-account surplus that has narrowed less than feared, and the UK's exposure to energy prices that has actually improved as gas storage levels rose.

UBS pointed to the rate differential. The BoE has kept its key rate at 5.25% since August, while the Federal Reserve and the European Central Bank have signalled cuts. That gap gives the pound a yield advantage that attracts carry flows. The bank's analysts wrote that as long as the BoE holds steady, the pound should stay bid against the dollar and the euro.

Political risk has not gone away. The UK faces a general election next year, and the ruling Conservative Party trails in polls. UBS said the market has already priced in a change of government. A Labour victory, the bank argued, would not necessarily be negative for sterling if it brings policy stability and fiscal discipline. The Middle East conflict adds a layer of uncertainty. The pound has not reacted sharply to the recent escalation, suggesting traders see limited direct exposure.