Pound-to-Dollar Price Forecast: GBP/USD at 1.35, UBS Still Sees 1.40

Market impact: mixed near term, medium-term bullish only if Fed tightening expectations fade.

The immediate signal is dollar-positive and GBP/USD-negative: the reported repricing of the September Fed-hike probability from roughly 35% to 57.5% raises expected US yields and improves the dollar’s carry advantage. That makes the recent decline to 1.3534 more than a technical pullback; it reflects a shift in the relative monetary-policy outlook.

UBS’s 1.40 December target remains materially above spot—about 3.4% upside—but it is conditional on the Fed repricing being reversed or absorbed. The bullish sterling case depends on reduced long-dollar exposure, relatively light sterling positioning, and the view that UK political risk is becoming less damaging. If US data continue to support higher-for-longer Fed policy, the dollar can remain supported and make the 1.38 area difficult to reclaim, weakening the credibility of the 1.40 forecast.

For traders, the key distinction is between positioning-driven dollar strength and a durable US macro reacceleration. If the Warsh-related move fades and subsequent US inflation, labor-market, or activity data soften, GBP/USD could recover as Treasury yields and Fed expectations decline. That would also favor broader dollar-sensitive assets, including EUR/USD and precious metals. Conversely, confirmation of renewed US inflation pressure or additional Fed hawkishness would likely extend dollar strength and keep GBP/USD under pressure.

The UK side is less immediately decisive. UBS’s longer-run 1.41 profile implies confidence that sterling can benefit from improved political risk premia and eventual capital reallocation, but that outlook would be vulnerable to weaker UK growth, easier Bank of England policy, fiscal concerns, or renewed political instability. The forecast also contrasts with the cited Q3 projection near 1.3327, highlighting substantial disagreement rather than a market consensus.

What matters next:

September Fed repricing, US inflation and employment data, Treasury-yield direction, Bank of England communication, and whether GBP/USD can stabilize around the 1.35 region before attempting to challenge 1.38. Until the dollar shock is shown to be temporary, the news is best treated as a short-term bearish catalyst for GBP/USD against a medium-term bullish sterling thesis, not as confirmation that the 1.40 target is on track.