Investing.com - Bank of America (NYSE:BAC) Securities has a constructive view on sterling for this year, but a tough start to the second quarter for the U.K. currency has caused the bank to take a second look.
A key part of the bank’s positive expectations for sterling this year has been that the pound would find cyclical support as the Bank of England would be amongst the last of the major central banks to cut against a backdrop of sticky inflation, particularly services and core, which remain above BoE’s tolerance levels.
However, whilst the pound remains the best performing currency year-to-date, the usual positive April seasonality has not played out, largely because of continued Fed repricing and renewed geopolitical risks.
Its quarter-to-date performance has been poor–sterling is down over 1.5% versus the dollar over the last month–and whilst geopolitical tensions have been the primary driver, recent comments from the BoE have sounded increasingly dovish.
These comments have surprised BoA Securities, given they come against the backdrop of improving data which would suggest a later rather than earlier start to a rate cutting cycle, more consistent with the bank’s call for an August rate cut.
“The key question is whether the BoE is taking an incremental step in its forward guidance towards easing, or whether they are making a concerted effort to bring forward market expectations for a rate cut?,” BoA asked, in a note dated April 24. “For now, we are inclined to think it is the former: nonetheless, GBP has succumbed to a cyclical unwind which looks excessive vs the rates move.”
The bank’s bias this week is to fade the decent dovishness and for the pound to retrace some of its losses.
“However, with June now pricing in a greater chance for cuts, we doubt that GBP will immediately recapture its recent highs ahead of the May BoE rate meeting,” BoA said. “Our favoured expression would be higher GBP versus the low yielders and versus EUR in particular.”