Synopsis:

Credit Agricole highlights a divergence between FX performance and stock market flows in 2025, noting that while European equities are benefiting from global diversification away from US markets under Trump’s second term, GBP has underperformed despite its relative rate advantage. This leads them to maintain a constructive outlook on GBP, particularly against European peers.

Key Points:

• Global asset rebalancing underway:
  Since the start of 2025, there’s been a clear push to diversify out of US stocks and bonds, triggered by Trump-era policy uncertainty.

• Equities vs FX divergence:

  • European equity indices (Eurostoxx, FTSE) have outperformed the S&P 500 and Nikkei.

  • EUR, CHF, and Scandinavian currencies have led the FX gains vs the USD, while GBP has underperformed.

• GBP looks undervalued:
  Despite retaining a rate advantage over the EUR and other European currencies, GBP has lagged in FX markets.

  • Credit Agricole’s short-term fair value model suggests GBP is undervalued vs EUR.

• FX model signals upside for GBP:
  Their valuation framework incorporates relative rate spreads and other key drivers, and supports a bullish bias on GBP, especially against the euro bloc.

Conclusion:

Credit Agricole sees GBP undervaluation as unjustified in light of its rate dynamics and expects catch-up potential, particularly vs EUR. Portfolio flows and valuation support a constructive GBP outlook, even as FX markets have not yet fully reflected equity rotation out of the US.