The British pound (GBP) has recently relinquished its position as the standout currency against the US dollar over the past year. However, analysts at Bank of America (BoA) assert that the foundations for a potential resurgence of the pound remain intact for the year 2025. Since the tumultuous events of September 2022, which triggered volatility in GBP, there has been a gradual but steady increase in its value. According to BoA, this rebound has been partly fuelled by the diminishing political turmoil in the UK and a favorable environment for currency carry trades.
One of the significant aspects contributing to the stability of the pound has been the resolution or at least the alleviation of political uncertainties that previously plagued the UK. The prospect of a “Trump 2.0” scenario in the United States is causing ripples of uncertainty globally, but BoA suggests that this will not disproportionately impact the UK. They argue that the UK’s economy is less likely to become the primary focus of the incoming US administration, thereby providing a breathing space for the pound.
Despite an overall positive outlook, lingering questions about the medium-term sustainability of UK public finances remain pertinent. The recent UK Budget has raised concerns regarding widening fiscal deficits and increased government borrowing. These factors, combined, could cast a shadow over long-term currency stability. Nevertheless, BoA has pointed out that the patterns observed in the market do not indicate that the UK is being singled out for punitive measures or specific fiscal discipline. This claim is substantiated by their analysis, which finds no substantial indicators of a unique risk premium related specifically to UK assets.
In their assessment of risk, BoA employs a framework that examines idiosyncratic risk premiums attached to GBP and finds the indicators relatively stable. Notably, core risk measures such as Credit Default Swap (CDS) spreads and volatility premiums specific to GBP do not reflect excessive concerns. This lack of market panic suggests that although GBP has recently weakened from its peaks, it is not indicative of a larger trend towards devaluation. Rather, BoA maintains that current fluctuations do not signify the dawn of a major decline in the pound’s value.
While the GBP has experienced some retreat from its recent highs, Bank of America maintains a cautiously optimistic view on the currency’s trajectory. The broader context of fiscal policy changes, coupled with a supportive economic environment, creates fertile ground for GBP’s potential reappraisal. Though uncertainty may prevail globally, the narrative surrounding the pound remains robust, suggesting that strategic positioning toward GBP could yield favorable outcomes in the coming years. The pound’s fundamental strengths, supported by near-term fiscal stimuli, reinforce the long-term bullish outlook, making it one currency to watch closely as the political landscape evolves.