(06 February 2020)DAILY MARKET BRIEF 1:GBP: Still a long-term investment

Negotiations around the UK's departure from the European Union dominated the direction of the British pound over the past few years.

Now, as Boris Johnson's government discusses a trade deal with the EU, investors' focus will likely shift to the UK's economic health, say UBS strategist Thomas Flury and economist Dean Turner.

While the latest set of economic data has not been "uniformly positive" and the lack of investment growth has taken its toll, there are clear signs of improvement, they say.

The Bank of England has responded by cutting its forecasts for supply growth to 1.1%, implying that it is willing to keep rates steady due to supply constraints.

Markets are, however, pricing in almost two rate cuts until December.

If the Bank of England does not budge, the pound will be supported.

Investors may want to trade on the volatility of the currency in the meantime, the analysts say.

"Ongoing demand for the US dollar and remaining uncertainty around the EU-UK trade relationship should keep GBPUSD below 1.40", Flury and Turner say.

"Dips below 1.30 present a buying opportunity," they add.

CIO still expects GBPUSD to rise to 1.40 by the end of the year.

Against the Swiss franc, the GBP should trade at around 1.29 by end-2020, even if GBPCHF remains at the low end of the 1.25–1.35 range.

"The CHF is overvalued due to safe-haven-related positions and Switzerland's surprisingly steady economic performance ever since the great financial crisis," Flury and Turner say.

"The pound, on the other hand, is still very much undervalued, mainly due to Brexit uncertainty. We expect this undervaluation to be corrected, but only gradually."

Their longer-term forecast still centers on 1.29, as the pound should be supported by increasing clarity around the final terms of Brexit, and the CHF should remain strong given the Swiss National Bank's limited room to ease policy further.

By UBS