Political worries have left the euro looking cheap but still haven’t had enough impact on the pound, according to UBS, which thinks sterling could drop another 9 per cent against the dollar this year.

In a report released today, the Swiss bank said fears around the French election had weighed on the single currency, but “we do not expect politics to weigh meaningfully on the euro beyond H1 and especially past the French presidential vote”.

UBS expects the euro to appreciate to $1.13 by the end of the year, with gradual further strengthening to follow.

As the bank itself admits, its optimism around the euro has been “among our most out of consensus views”, but increasing numbers of analysts have been changing their views in recent weeks.

Yesterday MUFG became the latest group to abandon its prediction that the euro and dollar would reach parity in the second quarter, following similar moves from Citi and Barclays.

On the pound, in contrast, UBS in staying bearish. Sterling has strengthened slightly since the start of the year, but the bank says “we are yet to see tangible signs of the rebalancing of the UK economy while political risk persists as Brexit negotiations get under way”.

While the eurozone’s economic recovery goes from strength to strength and the European Central Bank looks to begin tapering its asset-purchasing programme, the picture in the UK is much less positive, UBS argues:

PMIs have been moderating recently despite the acceleration in the rest of Europe and retail sales releases have also been mixed. In addition rising inflation is likely to squeeze real earnings further and weigh on consumption.

The MPC is unlikely to turn outright hawkish any time soon… We expect the BoE to revert to a more accommodative policy stance towards year-end as economic activity gradually softens, which would provide an additional headwind for sterling.

UBS is keeping its end of year forecast for sterling at $1.13, which together with the predicted improvements in the euro could see the pound and euro at parity by the end of the year.

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