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The pound has been fluctuating ever since the UK voted to exit from the European Union in June, and has shown one of the worst performing currencies in the world this year.
While some banks such Deutsche Bank and HSBC place their stakes on the pound continuing to crash, UBS reckons that the British currency will “stabilise and recover over the next six to 12 months,” and predicted the pound to jump up to $1.36 in twelve months’ time. The average price in the first six months of 2016 — before the ramifications of the Brexit started to manifest themselves — was $1.43.
Dean Turner, the UBS economist, in a memo refers to 4 main reasons the pound will restore the given ground in 2017. First, Turner says that markets reaction was over-exaggerated and markets pricing for a “very hard Brexit” and a drastic decline in the UK economy are both unlikely.
The second reason is that a low pound rate will keep traders from shorting it. UBS estimates the current pound to be undervalued. While that discount is not expected to end in the near term, investors at current levels will think twice before taking out a new short position on sterling.
The third reason is that due to the cheap pound UK assets such as property, companies and bonds are becoming more allowable to international investors. The increase in demand will, respectively, strengthen the currency position.
Last but not least, the final reason is a weaker currency will diminish the UK’s current account deficit. The pound’s steep downfall is predicted reduce the UK’s trade gap, running at a near record level. A diminished deficit should cut another reason for investors to sell the currency.