Investing.com – Bank of America Securities has a constructive view on sterling for this year, but a tough start to the second quarter for the British currency has prompted the bank to take a second look.
A key part of the Bank’s positive expectations for sterling this year was that the pound would find cyclical support, as the Bank of England would be one of the last major central banks to make cuts against a backdrop of persistent inflation, with particularly in the services and core markets. that remain above the BoE’s tolerance levels.
While the pound remains the best performing currency so far, the usual positive seasonality has failed to materialize in April, largely due to continued Fed rate revisions and renewed geopolitical risks.
Quarter-to-date performance has been poor – sterling is down more than 1.5% against the dollar in the past month – and while geopolitical tensions have been the main driver, recent comments from the BoE are sounding increasingly dovish .
These comments have taken BoA Securities by surprise as they come against the backdrop of improving data, which would indicate a later rather than earlier start to a rate cutting cycle, more in line with the bank’s call for a rate cut in August.
“The key question is whether the BoE is taking an incremental step in its forward guidance towards easing, or whether it is making a concerted effort to advance market expectations for a rate cut?” BoA asked in an April 24 note. “For now, we are inclined to think it is the former: nevertheless, the GBP has succumbed to a cyclical relaxation that seems excessive compared to interest rate movements.”
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The bank’s aim this week is for the significant easing to disappear and for the pound to recover some of its losses.
“However, with June pricing in a greater likelihood of cuts, we doubt the GBP will immediately regain its recent highs ahead of the BoE’s May rate meeting,” BoA said. “Our favorite expression would be a higher GBP against the low-yielding countries and especially against the EUR.”
