Bank of America forecasts pound to fall to 1.28 by year-end on US outperformance and higher rates. GBP/USD near 1.3390 after rally.
Bank of America expects sterling to weaken against the dollar by year-end, with a GBP/USD target of 1.28. The GBP/USD traded near 1.3390 on Monday, recovering from June lows near 1.2615.
Strategists at the bank said US economic outperformance and higher interest rates should continue favoring the dollar. The recovery in sterling has been driven by a softer dollar and shifting rate expectations, they wrote in a note. The rally looks temporary.
The year-end forecast implies roughly 4% downside from current levels. The call rests on the view that the Federal Reserve will hold rates higher than markets currently price. The Bank of England faces a more difficult growth-inflation trade-off, the strategists said.
Sterling's recent gains surprised some traders. UK data showed slowing growth. The bank argues the recovery has run its course. "The market is pricing too many BOE cuts relative to the Fed," they said. "That gap will close as the data forces repricing."
A break below 1.30 support would open the path toward 1.28, according to the note.
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