UBS Forecast: US Dollar Weakness Continues – GBP/USD Eyes 1.38 Amid Fiscal Concerns

Key Takeaways:

• US dollar under pressure due to fiscal policy risks and rising debt concerns.

• GBP/USD hits 3-year highs near 1.35, with UBS targeting 1.38 on further strength.

• Unusual divergence: Dollar weakens despite higher Treasury yields, signaling market skepticism.

• Bank of England rate cuts expected, but Pound remains supported by UK-US trade deal optimism.

Dollar Weakness Deepens as Fiscal Risks Loom

The US dollar (USD) has faced renewed selling pressure this week as investors grow increasingly wary of long-term US fiscal sustainability. Despite rising Treasury yields, the greenback has struggled to gain traction, suggesting deeper structural concerns.

UBS analysts highlight an unusual divergence—typically, higher yields strengthen the dollar, but market skepticism over US debt levels is overriding this dynamic.

Why Is the Dollar Falling?

• Fiscal policy uncertainty: Growing US deficits and political gridlock raise long-term stability concerns.

• Risk premium on USD: Investors demand higher compensation for holding dollar assets amid debt fears.

• Yield disconnect: Even with elevated bond yields, the dollar fails to rally, signaling bearish sentiment.

UBS believes this trend could persist, with Treasury yields more likely to fall than the dollar staging a strong rebound.

GBP/USD Surge: Pound Strengthens to 3-Year Highs

The British pound (GBP) has capitalized on dollar weakness, with GBP/USD climbing above 1.35—its highest level in three years. UBS sees further upside potential, targeting 1.38 and recommending buying dips toward 1.3390.

Key Drivers for Pound Strength

✅ Risk-on sentiment: Global market optimism supports high-beta currencies like the pound.
✅ UK-US trade deal advantage: The UK remains the only country with a bilateral trade agreement with the US, boosting GBP appeal.
✅ Bank of England policy: While UBS expects quarterly rate cuts, the Pound still benefits from relative stability compared to USD.

Outlook: Will GBP/USD Reach 1.38?

UBS maintains a bullish stance on GBP/USD, citing:

• Continued dollar vulnerability due to fiscal risks.

• Structural support for the Pound from trade and monetary policy dynamics.

• Potential pullbacks to 1.3390 as buying opportunities before a push toward 1.38.

Final Thoughts

With the US dollar struggling amid fiscal uncertainty and the Pound holding strong, GBP/USD could extend gains toward 1.38 in the coming months. Traders should watch for:

• US debt ceiling and budget debates – Further political risks could weaken USD.

• Bank of England rate decisions – Faster cuts could limit GBP upside.

• Global risk sentiment – A shift to risk-off trading may temporarily boost the dollar.

For now, the path of least resistance favors the Pound, keeping the 1.38 target in play.