Pound Can Still Rise against Euro and Franc into Year-end Says Bank of America

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The jitters in Sterling bond and currency markets will likely fade, argue Bank of America.

The call follows a selloff in UK bonds and Pound Sterling in the wake of the UK government's budget that revealed a significant increase in the country's debt was planned.

FX analysts at Bank of America say the FX market is grappling with how to trade GBP against the backdrop of rising yields.

"Our instincts lead us to conclude that the scars of September 2022 run deep and GBP has been spooked by speed of the Gilt sell-off," says Kamal Sharma, FX Strategist at Bank of America.

"We push back against this narrative," he adds.

The Budget was not well received by the bond market, and UK bond yields moved higher, with 2-year yields rising nearly 20bps and 10-year yields up 15 bps.

Analysts warn that this is a potential sign that the Chancellor overestimated the market’s desire to absorb more sovereign debt issuance from the UK.

However, Sharma explains that UK yields are playing catch-up to the earlier move in European Fixed Income markets, which have fallen of late.

"Whilst fiscal stimulus has been larger than expected and forced a repricing for BoE easing. We are not churlish enough to dismiss the quantum of issuance but not believe the conditions are in place for this to be a meaningful driver for GBP," he says.

As such, Bank of America remains constructive on GBP and look for EUR/GBP to weaken into the end of the year and GBP/CHF to rally.