The Pound Sterling Reset Means the Lows Are In, According to Bank of America

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Following years of volatility, the British Pound is looking like its old self again, and it has likely passed its lows, according to a leading analyst who once likened the UK's currency to that of an emerging market.

Kamal Sharma, FX strategist at Bank of America, says the Pound "is back into the G10 fold" after an overhanging risk premium linked to stresses like Brexit and the Liz Truss government has steadily been washed out.

He says a "sense of normality has returned," which greatly lowers downside risks.

Sharma explains that several idiosyncratic factors saw the Pound decouple from its traditional anchors. The most recent was Liz Truss's mini-budget of September 2022, which scared investors and resulted in a plunge in the value of the Pound, even as UK bond yields shot higher.

Typically, rising yields would have resulted in a rising Pound, confirming the Pound had made a break from traditional drivers. In fact, 2023 has been marked by Pound strength as it follows UK bond yields higher.

Bank of America's analyst says September 2022 marked the high point in market stress in UK assets.

Sharma has, at points since the Brexit referendum, likened the Pound to an emerging market currency owing to its dislocations from the fundamental factors that have traditionally driven in.

"The pound increasingly resembles the more liquid emerging market currencies rather than a core G10 currency," said Sharma back in 2020.

But, 2023 has seen the market 'price out' risk premium from the Pound, and it is now back in the "G10 fold".

"In many ways, GBP has traditionally been a relatively straightforward currency to analyse. Sterling has historically been guided by the global rates cycle but also the global risk cycle," explains Sharma.

Above: GBP is following rates markets again, making it more predictable. Image courtesy of Bank of America.

With traditional drivers back in control of the Pound, Sharma says it becomes easier to value, which "has implications for market participation."

"The lifeblood for any currency is predictability and having certainty around key variables," he says.

Bank of America thinks the Pound has likely passed its low points against the likes of the Euro and Dollar.

"GBP is no longer the outlier it has been in recent years," says Sharma.