GBP/USD: banks’ near-term forecasts

Bank of America FX Strategy Research notes that GBP has been broadly lower in the aftermath of the BoE decision with some of the main pairs having failed to break through resistance in recent weeks.

Sterling fell on last Thursday following the BoE’s rate announcement. The 7-1 vote to keep the rate on hold disappointed pound’s bulls. The BoE’s Governor Carney’s comments that Monetary Policy Committee might decide to raise rates faster than markets expect if the Brexit negotiations run smoothly failed to convince investors. Following the disappointing release of the American CPI figures GBP/USD rose higher. Here are the banks’ forecasts for the future exchange rate of GDP/USD.

Bank of America Merrill Lynch

Now the focus for traders shifts to UK data-watching with CPI release and retail sales both coming on Tuesday.

The Bank of America’s strategists believe that pound might meet several headwinds looking ahead. The US economic data indicates further signs of weakness. The uncertainty amid upcoming General elections also weights on the pound. Markets appear to be priced for a Conservative majority. The opposite outcome might hurt the pound.

The bank’s analysts suggest selling GBP/USD on rallies in the coming weeks.

Nomura

Nomura’s analysts hold the opposite view. The believe that the pound might gain some strength in the medium term due to the following factors:

• the inflation premium in GBP looked overstretched.
• the Bank of England will probably become less pessimistic due to a better global growth.
• the difficulties associated with the Brexit process are already priced in.

The strategists indicate that the next risk event for the pound will be the 8 June general election. An outcome with the strong majority for the conservatives will be favorable for the pound.  

Nomura analysts expect GBP/USD to test 1.37 by year-end. Also, they recommend going long on GBP against USD, EUR, and AUD in the second half of the year. 

The both teams of analysts suggest focusing on the UK general election as the next risk event for pound. This event might differently affect the GBP value. It will depend on the following factors:

1. how the outcome of the elections will affect the EU-UK negotiation process and terms on which the UK leaves the single European union.
2. how the General Elections will change the prospect for and possible outcome of a second Scottish independence referendum; and

Going forward, it is easier to make a bet for the pound’s depreciation rather than for its upsurge with the steady ongoing deterioration in UK fundamentals, and uncertainty over the June General Elections. In the short-term the Bank of America's strategy looks attractive.