Strategist explains why he is ’constructive but cautious’ on British pound

Investing.com -- Bank of America (BofA) remains optimistic but cautious on the British pound, pointing to a difficult start to the second half of the year and a buildup of negative sentiment driven by fiscal concerns and a lack of market momentum.

“We have been constructive toward GBP for much of this year, with fleeting success, but have sensed a sea-change in sentiment over the past month,” BofA’s forex (FX) strategist Kamal Sharma said in a note.

“A confluence of factors perhaps better explains the malaise towards GBP: deteriorating U.K. data, BoE repricing; [and] fiscal dominance impacting broader G10,” he added.

While recent political events have added to the uncertainty, the strategist stresses that the pound had already been under pressure.

Sharma believes the weak Q2 performance may have been distorted by tariff frontloading and tax changes, but expects a rebound in Q3, supported by labor market resilience and fiscal stimulus. Consensus forecasts still anticipate more than 1% growth in the second half of 2025.

Overall, BofA remains “constructive but cautious” on the pound. The bank’s FX Factor Signal model highlights that while short-term trends have turned bearish, traditional valuation anchors like rates and volatility imply the pound is undervalued.

Sharma also points to the failure to break out of long-standing trading ranges as a key constraint, though it sees conditions now in place for a potential bounce.

“Traditional anchors for GBP such as FX volatility and rates suggest GBP is cheap,” the note said, adding that structural negativity around U.K. public finances has created “some asymmetric risks to the upside,” especially as quantitative tightening slows and fiscal policy shows flexibility.

BofA’s economists have also aligned more closely with market pricing, removing their September rate cut forecast in light of improving labor market and forward-looking growth data. They now expect 50 basis points of easing by year-end, consistent with BoE guidance.

While fiscal discipline and political messaging remain under scrutiny, the bank argues that markets have been quick to penalize the pound.

“We continue to be struck by how markets are willing to find the U.K. guilty of fiscal breaches before being the opportunity of proving innocence,” Sharma said.