"Constructive": BofA Lifts Pound Sterling Forecasts vs. Euro and Dollar

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One of Wall Street's biggest banks has raised its forecasts for the British Pound, saying it can benefit from its newfound status of "the USD of Europe".

Bank of America says strong labour data and improving fundamentals drive an expectation for the BoE to hold rates at 5.25% for longer than other central banks, ensuring the Pound benefits from advantageous 'carry'.

'Carry' refers to when investors borrow in a low interest rate currency to fund in assets of a higher interest rate currency, creating a bid for this currency. It has been one of the most powerful driving forces in currency markets since central banks started raising rates, and its influence looks set to dominate as rates come down.

"Our increasingly constructive view on GBP is now formally hardcoded into our 24-25 profile," says Kamal Sharma, an analyst at Bank of America in London.

Sharma has often featured on the financial news pages thanks to his post-Brexit analysis of the Pound, at one point describing its behaviour as resembling that of an Emerging Market currency.

Now, he has another interesting comparison for Sterling: "GBP = USD of Europe".

"What has been relevant for the U.S. can equally be applied to the UK with both economies suffering from elevated services inflation and tight labour markets," he says Sharma.

Above: "GBP/USD forecasts - New vs Old. Upward revisions to GBP/USD fcasts frontloaded in 2024" - Bank of America. Track GBP with your own custom rate alerts. Set Up Here

"Though U.S. growth has been stronger for longer versus the UK, the nuance here is that expectations around UK macro have been very low. With the domestic economy continuing to improve, the pessimistic read on UK growth is harder to reconcile," he adds.

The Dollar and Pound have both performed well in 2024 as markets scale back expectations for the pace of interest rate cuts at the Bank of England and Federal Reserve, reflecting an apparent market view that what's good for the Dollar is good for the Pound.

Above: "EUR/GBP forecasts - New vs Old. EUR/GBP to trough at 0.84 in H2 2024" - Bank of America.

Bank of America's forecasts reveal it to be more bullish on GBP/USD and GBP/EUR than the consensus:

The Pound to Dollar exchange rate is now forecasted to be 1.31 by mid-year, up from 1.26 previously. The year-end target is 1.37, up from 1.33 previously.

The Euro to Pound exchange rate is seen at 0.84 by mid-year, down from 0.87 previously, and 0.84 by year-end, down from 0.88 previously.

"For EUR/GBP, our profile is almost the mirror image of the consensus," says Sharma.

These projections equate to a Pound to Euro forecast of 1.19, up from 1.15 and 1.1360, respectively.