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Bank of America (BofA) analysts suggested that the market may be underestimating the risk of the upcoming US tariffs set to take effect on April 2, 2025.
BofA analysts indicate that the European Union (EU) may face greater risks from these tariffs compared to the United Kingdom (TADAWUL:4280) (UK), as the UK maintains a relatively small goods surplus with the US. The market appears to anticipate tariffs on select products but not widespread tariffs across all goods.
Despite the looming tariff deadline, BofA’s proprietary data reveals that hedge funds have been purchasing the euro (EUR) after a period of selling it in previous weeks. This activity suggests a shift in market positioning ahead of the tariff implementation date.
The market’s stance on the US dollar (USD) and the British pound (GBP) is neutral, but there is a notable long position on the EUR, although it is not considered overstretched. Additionally, BofA’s quantitative analysis has observed a new high in the EUR/USD option skew for calls.
Furthermore, BofA highlights a historical pattern of positive seasonality for the GBP in April. This trend is attributed to FTSE-listed companies repatriating overseas earnings to pay out dividends. While the impact of this seasonality has diminished since 2017 due to Brexit-related structural changes, BofA anticipates that the GBP will still experience seasonal tailwinds. As such, it sees room for gains versus the euro.
With the return of more normal trading conditions in the UK, the GBP is expected to benefit. Bloomberg data supports this outlook, noting that April is the second most significant month for the announcement of dividend allocations by UK companies.
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