Investing.com — Bank of America analysts have maintained a bullish stance on the British pound, even as they acknowledge increased downside risks and ‘glass half empty’ investor sentiment.
The firm estimates that a risk premium has been a major factor in the currency’s recent weakness, contributing to around 1.2% of the GBP’s decline.
The analysts have expressed confusion about the specific causes behind the rise in UK bond yields, especially in the absence of new, relevant data. Despite concerns about Britain’s twin deficits and the early timing of these developments in 2025, the Bank of America team continues to see a constructive outlook for the GBP. They believe that the market is already responsible for much of the negative news, although they admit that risks have escalated.
In terms of market flows and positioning, long positions in GBP are considered vulnerable in the short term, but overall market positioning remains light. Recent data indicates a continuation of the trend of liquidating long positions. However, Bank of America analysts suggest that the current environment could be conducive to a recovery given low expectations around the GBP.
The report also discusses the risk premium, which analysts predict will decline as the market’s focus shifts to the US dollar (USD). They suggest that investors looking to take advantage of the declining GBP risk premium can consider bearish three-month EUR/GBP seagull structures.
Bank of America outlines several reasons for their continued bullish view on the GBP. They expect UK final interest rates to be in line with their economists’ Bank of England projections, and expect the European Central Bank final interest rates to adjust more significantly.
Furthermore, they argue that while British growth is limited by structural factors, it is offset by weaker growth in Europe, suggesting that Britain could outpace European growth. Finally, they argue that an accelerated easing cycle could benefit the pound if it addresses concerns about stagflation and supports growth without endangering fiscal stability.
