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Investing.com -- Bank of America has lowered its pound sterling forecasts as rising term premiums and concerns about the upcoming U.K. Budget on November 26 put pressure on the British currency.
The global bond market selloff has exposed what BofA calls the U.K.’s "Achilles’ Heel," with term premiums hitting multi-year highs and GBP/USD volatility increasing ahead of the Budget announcement.
Particularly concerning for the pound is that recent market turbulence has occurred without new information, highlighting sterling’s vulnerability to negative moves in fixed income.
BofA analysts noted that the correlation between the pound’s trade-weighted index and 10-year Gilt yields has turned negative over the past two weeks, creating a headwind for the currency. This weakness comes despite recent improvements in U.K. economic data.
The bank now forecasts EUR/GBP to reach 0.86 by the end of 2025, revised from its previous target of 0.83. For GBP/USD, the bank has lowered its end-2025 target to $1.40 from $1.45, and its end-2026 forecast to $1.51 from $1.58.
BofA believes the November Budget is shaping up to be "the binary event of the year" for the pound.
However, the bank does not expect the government to break its Fiscal Rule, noting that Chancellor Rachel Reeves’ comments about maintaining fiscal discipline and implementing spending cuts have been well-received by investors.
The bank suggests that a combination of spending cuts and tax increases would be most palatable to markets. While fiscal tightening risks slower growth, BofA notes that given the inverse correlation between the pound and yields, this may not necessarily be negative for sterling.
Beyond 2026, BofA anticipates "further, albeit limited" upside for the pound against the euro, supported by improving global growth and lower inflation.