By Jamie Chisholm
The British pound is trading at the highest level versus the dollar since July
It’s time to buy the pound, BofA says, as the U.K. currency hits a seven-month high versus the U.S. dollar.
A somewhat softer-than-expected U.S. jobs report released Friday contributed to the British pound (GBPUSD) gaining 0.5% to trade at $1.287, the highest level since July.
A reduction of political risks, sticky British inflation and technical tailwinds could see cable, as the exchange rate between the pound and the dollar is known, quickly rise to the $1.30 to $1.314 range, said Bank of America strategists led by Kamal Sharma.
Expected yield differentials are one factor underpinning the pound. With U.K. inflation at 4.2%, more than twice the Bank of England’s 2% target, its monetary-policy committee is not expected to start reducing interest rates from their current 5.25% until August, according to pricing in swaps markets.
The Federal Reserve and European Central Bank are considered likely to start trimming borrowing costs in June.
“We expect the BOE to remain resolute in its current stance and reassured by recent consensus upgrades to U.K. growth,” Sharma said. “This should provide a strong cyclical basis for [pound] outperformance.”
Another factor supporting the pound is that the government’s spring budget this week contained no damaging surprises.
“Much of content of the Budget had been well trailed by the media and just as much as there were no ‘rabbits out of the hat,’ there were equally no negative surprises that could have destabilized either the Gilt [bond] market or [the pound],” said the BoA team.
Other observers have noted that U.K. political risk has also declined because the election this year is likely to be won by the opposition Labour Party, which is deemed by many analysts to be more economically competent than recent Conservative administrations.
BofA also said that with Brexit now out of the way – an issue that has weighed on sterling since the 2016 vote to leave the European Union – they expect that corporate repatriation of foreign earnings for paying pound-denominated dividends will support sterling.
“Given that a large proportion of U.K.-listed companies (energy and basic materials) are [dollar] functional, we would expect GBP/USD to be the main beneficiary of such flows,” BofA said.
Finally, technical factors suggest “a bullish cup-and-handle pattern is forming,” BofA said. “A breakout above the cup line at 1.2819-1.2827 will confirm it and signals upside to 1.30/1.3140. Medium term, this pattern can also suggest upside to 1.3315 and possibly 1.3610.”
-Jamie Chisholm
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03-08-24 0929ET
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