Buy Pound-Dollar says Bank of America

Above: “Cup and handle base plus bullish seasonal period” – Bank of America.

Bank of America has just released a call to buy the Pound-Dollar exchange rate (GBP/USD), citing the UK’s Spring Budget announcement, strong April seasonality and technical developments.

“We have made the case for GBP cyclical outperformance recently and following the Spring Budget we are now ready to formalise this view,” says Kamal Sharma, FX Strategist at Bank of America, in a note out Friday.

Bank of America notes much of the 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 destabilised either the Gilt Market or GBP.

“The Budget is part one of a triumvirate of positive cyclical forces which we think will serve to underpin GBP,” says Sharma.

He notes although the Budget does not materially alter the Bank of England’s calculation on rate cut timing, at the margins, it could make them more hawkish.

“Furthermore, with the BoE Decision Maker Panel 1yr inflation expectations rising 3.3%, we remain comfortable with our view that the BoE will cut rates in August at the earliest,” says
Sharma.

Seasonality is also favourable, with the analyst noting April tends to favour GBP/USD.

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“With Brexit now out of the way (the reason why GBP underperformed in 2022, 2019, 2018), we would expect corporate repatriation of foreign earnings to pay GBP dividends to dominate through the month once again,” says Sharma.

Given that a large proportion of UK listed companies (energy and basic materials) are USD functional, Bank of America expects GBP/USD to be the main beneficiary of such flows.

“Against this backdrop, we expect the BoE to remain resolute in its current stance and reassured by recent consensus upgrades to UK growth. This should provide a strong cyclical basis for GBP outperformance,” says Sharma.

He initiates a trade that targets a move to 1.3074.