Synopsis:

BNP Paribas maintains a bullish bias on GBP for the rest of 2025, although they expect it to underperform the EUR due to less scope for investor rotation. GBP/USD is forecast at 1.36 by year-end, with EUR/GBP seen rising to 0.87.

Key Points:

• Limited Capital Reallocation Impact:
  While global capital is rotating out of USD assets, BNPP sees less benefit for GBP because international investors already hold large allocations to UK assets, especially gilts.

• Forecasts:
  GBP/USD year-end target remains at 1.36, and EUR/GBP is expected to rise to 0.87, implying moderate GBP underperformance versus EUR.

• Domestic Resilience:
  Despite concerns about the UK’s fiscal stance and growth outlook, no major deterioration has occurred. These risks are not expected to materialize in the near term.

• GBP Positioning in G10:
  GBP is projected to perform in the middle of the G10 pack, supported by stable domestic fundamentals and reduced expectations for aggressive BoE rate cuts.

Conclusion:

BNPP stays constructive on GBP but sees it trailing the EUR in gains due to saturation in foreign holdings and limited benefit from global portfolio rebalancing. Resilient domestic conditions, however, provide a floor under GBP performance.