The British pound (GBP) has long been a barometer of geopolitical and economic fragility, and 2025 is no exception. With UBS issuing a stark bearish outlook for the currency and global tariff uncertainty compounding the UK’s post-Brexit challenges, strategic shorting of GBP appears increasingly justified. This analysis unpacks the interplay of fiscal instability, trade policy risks, and macroeconomic trends that position GBP as a prime candidate for bearish positioning.

UBS’s Bearish Thesis: A Post-Brexit Economy in Peril

UBS’s bearish stance on GBP is rooted in a confluence of political, fiscal, and economic headwinds. The bank projects the EUR/GBP exchange rate could rise to 0.8800 by year-end, signaling a weaker pound against the euro [1]. This forecast hinges on three pillars:

  1. Brexit-Induced Uncertainty: Persistent tensions in UK-EU negotiations and the looming risk of a no-deal Brexit continue to erode investor confidence. Rabobank warns that GBP could slide below $1.20 in the next three months if trade relations sour [2]. The UK’s fragmented regulatory landscape and lack of deep trade agreements post-Brexit have left the economy exposed to sudden shocks.

  2. Fiscal Weakness and Inflationary Pressures: The UK faces a “mile-wide, inch-deep malaise” in public finances, with high debt levels, persistent budget deficits, and stubborn inflation. While energy price interventions may temper CPI temporarily, underlying inflationary pressures remain unresolved, with the Bank of England expected to cut rates to 3.25% by year-end [3]. This creates a self-reinforcing cycle: weak growth forces fiscal stimulus, which exacerbates inflation and undermines the pound’s purchasing power.

  3. Policy Divergence and Political Risk: Upcoming elections and the Truss government’s ambitious but debt-heavy “Trussonomics” strategy—prioritizing deregulation and energy production—have raised red flags. With GBP 400 billion in borrowing anticipated, market skepticism about fiscal discipline is palpable. UBS argues that such policy divergence undermines long-term investor trust, particularly as the UK’s corporation tax rate (19%) becomes less competitive against EU peers [4].

Global Tariff Uncertainty: A New Layer of Volatility

The UK’s economic vulnerabilities are further amplified by global tariff shifts, particularly under U.S. President Trump’s trade policies. A 10% blanket tariff on UK goods imposed in April 2025 triggered immediate market jitters, echoing the Brexit referendum’s fallout [5]. While the UK’s exemption from higher U.S. tariffs on steel and aluminium provided short-term relief, UBS remains skeptical about the long-term value of such narrow trade deals.

The ripple effects of these tariffs are profound:
– Export-Dependent Sectors at Risk: The UK’s manufacturing and agricultural sectors face margin compression as U.S. demand softens. A weaker GBP, while making exports cheaper, cannot offset the reputational damage of retaliatory measures or supply chain disruptions.
– Inflationary Tailwinds: Tariff-driven commodity price spikes could push CPI above 3.6% in Autumn 2025, forcing the Bank of England to delay rate cuts and prolonging monetary tightening [6].
– Investor Flight: Uncertainty surrounding future tariffs has already spooked capital markets. Emerging market debt, by contrast, is gaining traction as a “safe haven” for central banks seeking higher returns amid UK fiscal instability [7].

Strategic Shorting: Navigating the GBP Weakness

For investors, the case for shorting GBP rests on its structural vulnerabilities and the asymmetry of risks. While some analysts argue the pound could rebound to $1.40 if the UK outperforms the U.S. economy or the Fed adopts a dovish pivot [8], the broader macroeconomic narrative tilts decisively bearish. Key entry points for short positions include:

  • GBP/USD Below $1.30: A breakdown below this level would validate UBS’s EUR/GBP 0.8800 target and signal a loss of confidence in the UK’s fiscal credibility.
  • GBP/EUR Above 0.8500: A test of this resistance could trigger a selloff as Brexit-related fears resurface.
  • Macro Triggers: A no-deal Brexit scenario, a U.S. recession, or a spike in U.S. tariffs would act as catalysts for GBP’s decline.

Conclusion

The GBP’s fragility in 2025 is not a temporary blip but a symptom of deeper structural issues: a post-Brexit economy struggling to adapt, a fiscal policy framework ill-equipped for global volatility, and a currency increasingly viewed as a political risk proxy. UBS’s bearish outlook, combined with the corrosive impact of global tariffs, creates a compelling case for shorting GBP. Investors who position themselves against the pound now may find themselves well-placed to capitalize on a currency that appears destined for further erosion.

Source:
[1] UBS maintains bearish stance on the pound with a clear EUR/GBP target [https://www.investing.com/news/forex-news/ubs-maintains-bearish-stance-on-the-pound-with-a-clear-eurgbp-target-93CH-4223845]
[2] GBP/USD off Lows, but Some See Risk Ahead as Brexit Talks [https://finance.yahoo.com/news/gbp-usd-off-lows-see-135817240.html]
[3] UK Economic outlook [https://kpmg.com/uk/en/insights/economics/uk-economic-outlook.html]
[4] The pound sterling crash – which British stocks are now a screaming buy [https://www.undervalued-shares.com/weekly-dispatches/the-pound-sterling-crash-which-british-stocks-are-now-a-screaming-buy/]
[5] Déjà Vu? The Market Impacts of Brexit and United States [https://www.mellon.com/insights/insights-articles/deja-vu–the-market-impacts-of-brexit-and-united-states-tariff-d.html]
[6] Economic and fiscal outlook – March 2025 [https://obr.uk/economic-and-fiscal-outlooks/]
[7] Central Banks & Emerging Markets Debt [https://www.ubs.com/uk/en/assetmanagement/insights/thematic-viewpoints/apac-and-emerging/articles/em-investment-grade-debt-2025.html]
[8] GBP/USD Forecast: Unlocking the Pound’s Potential Towards 1.40 [https://coinstats.app/news/1b9e207aeeb56011556d0cfbaf0bf610d34b664a3b5ea8f2f373c245c6072542_GBPUSD-Forecast-Unlocking-the-Pounds-Potential-Towards-140/]