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Investing.com - Sterling has had a tough month, but Bank of America thinks this bearish stance has been overplayed and remains constructive towards the pound, via a lower EUR/GBP position.
At 08:55 ET (12:55 GMT), GBP/USD dropped 0.1% to $1.3277, down 2.8% over the last month, while EUR/GBP fell 0.2% to £0.8690, up 0.7% over the course of the month.
For much of the past month, it appeared as if sterling was stuck in some kind of doom-loop – whatever the data, whatever the relative mood in markets, the pound was an unambiguous sell, said analysts at Bank of America Securities, in a note dated August 5.
“GBP/USD has been the chief protagonist over the past month, losing nearly 3%. We think part of the story on the reversal in GBP/USD may lie in the proximity of the recent highs to $1.40 – a level not breached since 2022 and a question mark on how to quantify its fair value,” said BofA.
“We would be more sympathetic to the markets bearish GBP view were it not for one crucial oversight: markets are not pricing in any idiosyncratic risk premium.”
It appears that some of the U.K.’s “wins” are being ignored by a more pervasive negative in the form of social media which has created a bearish narrative around the U.K. and its government and which has translated into a weaker currency and negative sentiment towards U.K. Gilts, the U.S. bank said.
BofA concedes that delivery of economic policy has been less than optimal, but pushes back against some commentators that the situation has become somewhat chaotic.
“Scratching beneath the surface and data shows signs of improvement in Q3; BoE pricing is consistent with our view and crucially, consumer metrics have improved. We are not here to provide a ringing endorsement of the U,K. or its policies but even after U.K. tax changes growth is still likely to be above 1.0% for the next three years (1.2%/1.3%1.5%). This hardly screams of an economy on the brink,” BofA said.
The bank therefore retains a constructive view on GBP into year-end, stocking “with our lower EUR/GBP conviction as we think the U.K. has emerged from the tariff tumult in a better position than the eurozone, that BoE pricing is a more accurate read vs ECB pricing (we still look for further easing from the ECB).”
For the U.K., like many other countries, Q1/Q2 data was significantly impacted by impending tariff announcements. Nonetheless this did not stop advocates of “doom-loop” from singling out sterling in particular.
“There are signs that the worst may be behind GBP (for now). Summer markets are notoriously fickle, but it seems to us that markets should have more pressing concerns such as the impact of the U.S. vs EU and Switzerland trade deals.”