JP Morgan Stays Positive on Pound Near-Term Outlook

JP Morgan's currency strategy team said the pound is likely to hold its ground in the near term, even as political and fiscal uncertainty in the UK persists. The bank's analysts pointed to supportive interest rate expectations and limited downside risks as reasons for their positive stance.

The pound has drawn support from the Bank of England's cautious approach to rate cuts. Markets have priced in a slower easing cycle compared to the Federal Reserve or the European Central Bank, which keeps the yield differential in sterling's favor, the analysts said.

JP Morgan's view contrasts with some bearish calls that focus on the UK's fiscal position. The bank acknowledged the risks but argued that current market pricing already reflects much of the negative news. A further deterioration in fiscal sentiment would be needed to shift the outlook materially, they said.

The dollar side also matters. A softer US dollar, driven by expectations of Fed rate cuts, has removed a key pressure for cable. JP Morgan sees the dollar remaining under pressure in the near term, which should support GBP/USD above the 1.30 level.

The bank's positive view on sterling is conditional. A sharp move higher in UK gilt yields or a breakdown in the government's fiscal credibility could change the calculus. For now, the analysts said, the risk-reward favors a constructive stance on the pound.

JP Morgan's note adds to a mixed picture for sterling. Some hedge funds have trimmed long positions after the recent budget. JP Morgan sees the pullback as a buying opportunity.

JP Morgan's analysts said the pound's near-term resilience reflects a market that has already priced in much of the political risk. A shift in that view would require a material change in the economic or fiscal outlook, they said.