Bank of America strategists, led by Kamal Sharma, are advocating for buying the British pound (GBP) as it reaches a seven-month high against the U.S. dollar (USD). The GBP rose by 0.5% to $1.287 following a somewhat softer-than-expected U.S. jobs report released on Friday, reaching its highest level since July.
Several factors contribute to the bullish outlook for the GBP. Firstly, a reduction in political risks, coupled with steady British inflation rates, suggests favorable conditions for the currency. Technical indicators also indicate potential upward momentum for the GBP, with Bank of America strategists targeting a range of $1.30 to $1.314 for the GBP/USD exchange rate.
Expected yield differentials further support the GBP’s strength. With UK inflation currently at 4.2%, double the Bank of England’s 2% target, the Bank of England’s Monetary Policy Committee is not anticipated to begin reducing interest rates from their current 5.25% until August. In contrast, the Federal Reserve and European Central Bank are expected to start trimming borrowing costs in June.
Bank of America expects the Bank of England to maintain its current stance, supported by recent consensus upgrades to UK growth prospects. This positive outlook provides a strong cyclical basis for the GBP’s outperformance.
Additionally, the absence of damaging surprises in the UK government’s spring budget further bolsters confidence in the GBP. The budget, which contained no negative surprises, was well-received by markets, contributing to stability in both the Gilt market and the GBP.
Other analysts have pointed out that political risk in the UK has decreased as the upcoming election is expected to be won by the Labour Party, which is perceived as more economically competent than recent Conservative administrations.
Bank of America also highlighted the impact of Brexit resolution on the British pound (GBP). With Brexit now resolved, a significant factor weighing on sterling since the 2016 referendum, BofA expects that the repatriation of foreign earnings by UK-listed companies to pay pound-denominated dividends will provide support to the GBP.
Moreover, BofA anticipates that GBP/USD will benefit from corporate repatriation flows, particularly from energy and basic materials companies that operate in dollar-denominated functional currencies.
From a technical perspective, BofA identified a bullish cup-and-handle pattern forming in the GBP/USD chart. A breakout above the cup line at 1.2819-1.2827 would confirm this pattern, signaling potential upside to the range of 1.30 to 1.3140. In the medium term, this pattern could also suggest further upside to 1.3315 and possibly even 1.3610.