Investing.com — Bank of America analysts maintained a bullish view on the British pound (), although they acknowledged heightened downside risks and a “glass half empty” investor sentiment.
The firm estimates that the risk premium was a significant factor in the currency’s recent weakness, contributing to approximately 1.2% of GBP’s decline.
Analysts expressed confusion over the specific causes of the rise in UK bond yields, particularly in the absence of new, relevant data. Despite concerns about the UK’s twin deficits and the early timing of those events in 2025, the Bank of America team still sees a constructive outlook for the GBP. They believe the market is already responsible for much of the negative news, although they acknowledge risks have escalated.
In terms of market flows and positioning, GBP longs are seen as vulnerable in the short term, but the overall market positioning remains weak. The latest data indicate the continuation of the trend of liquidation of long positions. However, Bank of America analysts suggest that the current environment may favor a recovery, given the low expectations for the GBP.
The report also discusses the risk premium, which analysts believe will decrease as the market’s focus shifts to the US dollar (USD). They suggest that investors looking to capitalize on the reduced risk premium for GBP could consider the bearish three-month structure of the EUR/GBP seagull.
Bank of America cites several reasons for their continued bullish outlook on GBP. They predict that terminal rates in the UK will align with the projections of their Bank of England economists and they expect the terminal rate of the European Central Bank to adjust more significantly.
In addition, they argue that while UK growth is constrained by structural factors, it is balanced by weaker growth in Europe, suggesting that the UK may outperform European growth. Finally, they argue that an accelerated easing cycle can benefit GBP if it eases concerns about stagflation and supports growth without jeopardizing fiscal stability.
