Investing.com — Analysts at Bank of America maintained a bullish stance on the British pound (), even as they acknowledge increased downside risks and a “glass-half-empty” sentiment among investors.
The firm estimates that a risk premium has been a significant factor in the currency’s recent weakness, contributing approximately 1.2% of the GBP’s decline.
Analysts have expressed confusion over the specific causes of the rise in UK bond yields, particularly in the absence of relevant new data. Despite concerns over the UK’s double deficit 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 the market is already responsible for much of the negative news, although they admit the risks have increased.
In terms of market flow and positioning, long GBP positions are considered vulnerable in the short term, but overall market positioning remains light. Recent data indicates a continuation of the trend of liquidation of long positions. However, analysts at Bank of America suggest that the current environment could be conducive to a recovery, given low expectations for the GBP.
The report also discusses the risk premium, which analysts expect to decline as market attention shifts to the United States dollar (USD). They suggest that investors looking to capitalize on the falling GBP risk premium could consider three-month bearish EUR/GBP gull structures.
Bank of America outlines several reasons for its continued bullish outlook on the GBP. They predict UK terminal rates will align with their Bank of England economists’ projections, and expect the European Central Bank’s final rate to adjust more significantly.
Furthermore, they argue that although UK growth is limited by structural factors, it is offset by lower growth in Europe, suggesting that the UK could outpace European growth. Finally, they posit that an accelerated easing cycle could benefit the pound if it alleviates stagflation fears and supports growth without compromising fiscal stability.
