Synopsis:
Bank of America reaffirms its bullish stance on GBP/USD, maintaining a year-end target of 1.44 significantly above the Bloomberg consensus of 1.29. While acknowledging increased downside risks following Germany's fiscal push, BofA sees structural and flow-based reasons to remain optimistic on the pound, especially relative to the euro.
Key Points:
1️⃣ UK Resilience vs. Eurozone Fragility:
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Despite the German fiscal "bazooka", BofA argues the UK Spring Statement did not unnerve bond markets, keeping the UK’s policy credibility intact.
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UK growth, though downgraded, is still expected to outperform the Eurozone in 2025-2026.
2️⃣ Relative Rate Dynamics Favor GBP:
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Markets are pricing the ECB terminal rate ~40bps above BofA’s forecast of 1.5%, suggesting that euro area rates may adjust lower.
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GBP stands to benefit from more stable UK rate expectations, implying downside in EUR/GBP.
3️⃣ Tariffs & Trade Exposure:
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The UK is not a key target for US reciprocal tariffs due to its relatively balanced trade and service-heavy export base, unlike surplus economies such as Germany or Switzerland.
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A higher global tariff regime is seen as less damaging to the UK relative to peers.
4️⃣ Geopolitical Realignment & UK-EU Ties:
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The evolving UK-EU security and defense coordination is seen as an avenue for wider economic and macro policy alignment, reinforcing the pound’s long-term outlook.
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The UK’s position between the US and EU could turn into a strategic advantage.
5️⃣ Equity Flows & Market Rotation:
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The current euro rally is seen as increasingly driven by US equity rotation, not bond markets, with less flow benefit for GBP. However, this may shield GBP from abrupt reversals in EUR strength.
Conclusion:
BofA stays firmly bullish on GBP/USD, targeting 1.44, which is 15 big figures above consensus. They argue the UK’s macro, policy, and geopolitical positioning offers relative advantages versus both the US and Eurozone. While recognizing increased downside risks, they view GBP as less exposed to the pressures facing the EUR and USD.
