Sterling has more upside – Bank of America

Investing.com – Sterling has lost its status as the only currency to have outperformed the US dollar year-to-date, but Bank of America thinks a constructive case for the UK currency remains in 2025.

Since the September 2022 GBP Crisis, sterling has been on an almost uninterrupted uptrend, BoA Securities said, helped by this year by the removal of political uncertainty and the conducive backdrop to carry. 

“Trump 2.0 notwithstanding, the conditions for further GBP outperformance remains our base case, reinforced by our expectations that the UK is unlikely to be the focal point for the incoming US Administration,” BoA added.

Several questions remain over the medium-term sustainability of UK public finances in the wake of the UK Budget and against the backdrop of widening deficits and heavy issuance, the bank noted. 

However, it would be wrong to assume that markets have singled out the UK for specific discipline. Our framework for idiosyncratic GBP risk premium finds no evidence of this. Measures of UK-specific risk premium are absent, including stable CDS and our favoured measure which is GBP vol premium. 

“As a result, whilst GBP has eased away from the highs in recent weeks, we do not see this as a start of a new phase of major retrenchment. The constructive narrative that we have set out remains valid. Trump 2.0 raises uncertainty but the UK is not unique here,” BoA said.

“The secular bullish case for GBP remains intact and has been helped by near-term fiscal stimulus. Trade uncertainty has risen, but we feel that the UK is better placed than many of its European peers to weather this storm.”