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Foreign exchange analysts at Investec, the commercial and investment bank, have raised their forecast targets for the Pound to Dollar exchange rate.
The decision is based on an expectation that the Bank of England foregoes a rate cut in August and that the new political dispensation improves sentiment towards UK assets.
"UK government policymaking to have been chaotic over the past few years, especially since the 2016 EU referendum, resulting in a degree of aversion towards UK assets. This may diminish over time," says Philip Shaw, an economist at Investec.
Although the new government is yet to lay set out its fiscal plans, it has already released the broad outlines of its agenda in the King's Speech.
"Its key aim is to raise GDP growth to 2.5% p.a., possibly initially by getting people back into the workforce, then by raising labour productivity growth. The UK has been something of a pariah in recent years and if the government is anywhere near successful in delivering higher growth, this could benefit various UK asset classes, including equities," says Shaw.
Investec says many overseas investors consider UK government policymaking to have been chaotic over the past few years, especially since the 2016 EU referendum, resulting in a degree of aversion towards UK assets.
"This may diminish over time, if and when the new government demonstrates that its economic plans, such as boosting trend growth and expanding housebuilding, are coherent," explains Shaw.
Investec notes that UK economic activity is picking up, which eases pressure on the Bank of England to cut interest rates, particularly given lingering questions over inflation's trajectory.
"We have therefore upgraded our view of sterling," says Shaw.
Investec now expects the Pound to rally to $1.32 by the end of year and $1.35 by the end of 2025.
The Pound is the best-performing G10 currency amidst improved sentiment towards the UK and ongoing support from the UK's relatively high interest rates. According to the latest data showing how global investors view the currency, investor optimism in the British Pound has reached record levels.
Weekly data from the Commodity Futures Trading Commission (CFTC) shows that the 'long' position on the Pound has risen to 0.183M contracts.
"GBP net long positions increased for the third consecutive week, in dramatic fashion," says Jane Foley, Senior FX Strategist at Rabobank.