Sterling, Swiss Franc Decline Over 12-Month
The finance service group, UBS, said that the sterling (GBP) and Swiss franc (CHF) had endured a steady decline for more than 12 months. The bank had viewed that the fading memory of Brexit, combined with expectations for rate hikes, would support sterling relative to the negative-yielding Swiss franc.
However, UBS had been disappointed on two fronts: first, United Kingdom inflation rose to 8% while Swiss inflation had kept to a relatively moderate 2%; second, a sharp fall in global risk appetite as recession concerns grew.
Diverging inflation had two direct effects on the GBPCHF exchange rate, wrote the bank in a note to clients. First, the fair value (the relative cost of goods in the UK to Switzerland) suggested GBP should stay weaker.
Second, the Swiss National Bank (SNB) currently seemed more dedicated to tightening monetary policy than was the Bank of England (BoE), whose concerns had turned to the prospects of a weakening economy rather than rising inflation.
Consequently, investors had shied away from holding the sterling as a reserve asset, according to UBS. Investors will learn more about the two central banks’ commitment to policy tightening on June 16 when they will hold press conferences on the same day.
The UK had already hiked rates four times and looked likely to soon signal a pause, noted UBS. The SNB, on the other hand, should be ready to end its negative rate regime, a step that might trigger strong flows in the Swiss money market.
Learning the lessons from other central banks, the SNB was likely to act cautiously and gradually. Keeping the CHF within certain rages was also likely, in order to ease investor concerns via exchange rate stability, in times of rising bond or equity volatility, added the bank.
In the long term, UBS expected GBPCHF to drop below 1.20 in response to shifts in the fair value and more attractive CHF rates. READ:
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It had lowered its quarter-end forecasts to 1.22 for Q3, 1.21 for Q4 and 1.20 for Q1 2023 (from 1.24, 1.28 and 1.30, respectively). UBS introduced a Q2 2023 forecast of 1.19. # Sterling, Swiss Franc Decline Over 12-Month
