Bank of America Shifts to Neutral on British Pound as Rally Nears Year-End Target

Bank of America analysts shifted their near-term stance on the British pound to neutral on July 17, after a month-long rally pushed the currency to levels approaching the firm's year-end price target. The bank had previously maintained a bullish view on sterling since the beginning of the year.

Rationale for the Shift

The downgrade follows a period of significant strength for the pound, which BofA noted was the best-performing currency over the past month. The rally was driven by a combination of factors:

• Positive carry
• Upbeat macroeconomic data surprises
• Recent political developments

A key catalyst for the change in outlook was the EUR/GBP exchange rate breaking below the 0.85 level, moving closer to Bank of America's year-end target of 0.84. The firm now expects a period of consolidation for the pair before its next move lower.

Valuation and Longer-Term Outlook

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Despite the near-term downgrade, Bank of America stated it remains more constructive on the pound than the market consensus for the end of 2026 and into 2027-28. The bank's analysis suggests the currency is not substantially overvalued at current levels.

A proprietary 500-day rolling valuation framework, which incorporates UK-US yield spreads and risk premiums, generates a fair value for GBP/USD of approximately 1.33. Compared to a spot rate of 1.35 at the time of the report, this implies sterling is only modestly rich by about 1-2%.

Volatility Forecast

Looking ahead, Bank of America anticipates that foreign exchange volatility will likely decline through the summer months. However, analysts expect a meaningful pickup in price swings around key political events later in the year, specifically the U.S. midterm elections and the U.K. budget announcement scheduled for November.