UBS Global Wealth Management (UBS GWM) has opened a short-term recommendation in favour of the euro versus sterling – amid UK political uncertainty around the Brexit negotiations.

In a note to clients UBS GWM recommends going long EUR against short GBP over the short-term.

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UBS GWM said it predicts markets will be disappointed by the Bank of England’s expected decision to increase interest rates in August. Markets are pricing in a 60% chance of an interest rake hike.

But UBS GWM said “UK economic activity lacks the muscle to trigger a BoE hike in August in line with market expectations”.

Dean Turner, UK economist at UBS Global Wealth Management, said: “We’ve long been advocates that economics not politics should drive markets. However, the current stalemate between the UK and Europe on a Brexit deal cannot be overlooked. In the near future, it is not just events in Threadneedle Street that will matter. Downing Street will be equally important in the minds of markets.”

Turner said: “We expect there to be a drag on sterling in the coming months as the Brexit back and forth continues.”

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Long euro: factors driving the position;

  • Political uncertainty- “The fragile nature of the current Brexit negotiations with the EU should put pressure on sterling in the coming months,” UBS said
  • Reviving inflation: “Inflation looks supportive for the euro. It lends credibility to the ECB’s decision to scale down its bond-buying programme,” UBS said.
  • Changing sentiment shown in the Purchasing Managers’ Index (PMI): “The outlook in the UK and Eurozone has been fairly in line in recent months. However, UBS GWM expects the Eurozone to bounce back from a soft patch and Brexit-related issues to dampen sentiment the UK. This will benefit a EURGBP position,” UBS said.

In comparison, UBS said the European Central bank has already managed market expectations, with a “dovish message” at its June meeting.

UBS GWM’s long euro, short sterling is a short-term recommendation that may differ from its CIO House View which outlines investment opportunities over a six-month time frame rather than short-term positions.