Investing.com — Bank of America analysts have maintained a bullish stance on the British Pound (), as they acknowledge rising downside risks and a “glass half empty” investor sentiment.
The firm estimates that the risk premium has been a key factor in recent currency weakness, contributing to around 1.2% of the GBP's decline.
Analysts have expressed confusion for some reasons behind the rise in UK bond yields, especially in the absence of new, relevant data. Despite concerns about the UK's two defaults and the first period of this development in 2025, the Bank of America team continues to see a positive outlook for the GBP. They believe that the market has already responded to most of the bad news, although they admit that the risk has increased.
In terms of market movement and positioning, the long term GBP is considered risky in the short term, but the overall market position remains bright. Recent data shows the continuation of the long-term liquidation trend. However, Bank of America analysts suggest that the current environment may be conducive to recovery, due to low expectations surrounding the GBP.
The report also discusses the risk premium, which analysts believe will decrease as the market moves towards the US Dollar (USD). They suggest that investors looking to capitalize on the downside GBP risk premium may consider bearish three-month EUR/GBP seagull structures.
Bank of America cites several reasons for continued bullishness on the GBP. They expect UK terminal rates to be in line with the Bank of England's economic outlook, and they expect the European Central Bank's terminal rate to adjust further.
In addition, they argue that while the UK's growth is constrained by structural factors, it is balanced by Europe's weak growth, suggesting that the UK may outpace Europe's growth. Finally, they argue that a faster cycle of easing could help the GBP if it eases inflationary concerns and supports growth without jeopardizing financial stability.