Bank of America remains bullish on GBP despite risks

Investing.com -- Bank of America (NYSE:BAC) analysts have maintained a bullish stance on the British Pound (GBP/USD), even as they acknowledge increased downside risks and a "glass half empty" investor sentiment.

The firm estimates that a risk premium has been a significant factor in the currency's recent weakness, contributing to approximately 1.2% of the GBP's decline.

The analysts have expressed confusion over the specific causes behind the surge in UK bond yields, particularly in the absence of new, relevant data. Despite concerns over the UK's dual deficits and the early timing of these developments in the year 2025, Bank of America's team continues to see a constructive outlook for the GBP. They believe the market has already accounted for much of the negative news, although they concede that risks have escalated.

In terms of market flows and positioning, GBP longs are considered vulnerable in the short term, but overall market positioning remains light. Recent data indicates a continuation of the trend of long position liquidation. However, Bank of America analysts suggest that the current environment may be conducive to a recovery, given the low expectations surrounding the GBP.

The report also discusses the EUR/GBP risk premium, which analysts believe is set to decrease as the market's focus shifts to the US Dollar (USD). They propose that investors looking to capitalize on the declining GBP risk premium could consider bearish three-month EUR/GBP seagull structures.

Bank of America outlines several reasons for their continued bullish outlook on GBP. They anticipate that UK terminal rates will align with their economists' Bank of England projections, and expect the European Central Bank's terminal rate to adjust more significantly.

Additionally, they argue that while UK growth is constrained by structural factors, it is balanced by weaker growth in Europe, suggesting the UK could outpace European growth. Lastly, they posit that an accelerated easing cycle may benefit GBP if it alleviates stagflation concerns and supports growth without compromising fiscal stability.