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Bank of America calls pound Eurodollar, raises forecasts for GBP-EUR and GBP-USD

2024-02-22

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One of Wall Street's biggest banks has raised its forecast for the pound, saying it will benefit from its newfound "Eurodollar" status.

Bank of America said strong labor data and improving fundamentals have prompted expectations that the Bank of England will keep interest rates at 5.25% longer than other central banks, ensuring that the pound benefits from favorable "arbitrage".

"Arbitrage" refers to investors borrowing low-interest-rate currencies to invest in assets in high-interest-rate currencies, thereby generating a bid for that currency. This has been one of the strongest drivers in the foreign exchange market since central banks began raising interest rates, and as rates fall, its influence appears to be taking hold.

"Our increasingly constructive view on sterling has now been formally written into our 24-25 forecasts," said Kamal Sharma, an analyst at Bank of America in London.

Sharma, who regularly appears in financial news for his analysis of the pound post-Brexit, once described the pound's performance as similar to that of emerging market currencies.

Now, he has another interesting comparison for the pound: "GBP = Eurodollar".

"What is relevant for the US applies equally to the UK, as both economies face rising services sector inflation and tight labor markets," he said.

He added: "While US growth has been stronger than UK growth for longer, the nuance here is that expectations for UK macroeconomics have been very low. As the domestic economy continues to improve, it is harder to be pessimistic about UK growth reconcile."

Both the dollar and sterling are doing well in 2024 as markets reduce expectations for the pace of rate cuts from the Bank of England and the Federal Reserve, reflecting a clear market view that what's good for the dollar is also good for sterling.

Bank of America's forecast shows that it is more bullish on GBP US and GBP EURO than the market consensus.

The pound is currently expected to reach 1.31 by mid-year, higher than the previous 1.26; the year-end target is 1.37, higher than the previous 1.33.

The euro is expected to reach 0.84 by mid-year, down from 0.87 previously, and 0.84 by the end of the year, down from 0.88 previously. "For the euro, our forecasts are almost consensus," Sharma said. These forecasts are equivalent to 1.19 GBP, which is higher than 1.15 and 1.1360 respectively.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Bank of America calls pound Eurodollar, raises forecasts for GBP-EUR and GBP-USD

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