Sterling set to strengthen further on yield advantage, UBS says

According to UBS, the British pound is set to strengthen further in the coming months due to a combination of factors. The bank's recent note highlights the stabilization of the pound since mid-July after significant gains in June and July. UBS points to several reasons for this strengthening, including the search for yield, elevated short sterling positions, and the release of strong economic data.

The pound's yield surpasses that of the euro by approximately 1.5 percentage points, making it the highest-yielding currency in Europe besides the Norwegian krone. UBS expects the upward pressure to continue as the September European Central Bank rate hike is anticipated to mark the end of the tightening cycle. However, UBS cautions that UK politics pose a significant risk, with markets closely watching Prime Minister Andy Burnham's budget announcements.

Should the pound's recovery prove stronger than expected, the bank anticipates it could reach levels above 0.86, potentially challenging their current forecast.