The British pound has unexpectedly become a safe haven for investors due to the Bank of England's hawkish stance and political developments in the U.S. and Germany. This shift is likely to end the pound's six-year streak of declines against the U.S. dollar and achieve the best weekly performance against the euro since 2024.
Major banks, including JPMorgan Private Bank and Crédit Agricole, predict further appreciation of the pound (GBP, Financial), as investors shift their outlook from 10 days earlier when a government budget announcement led to increased selling.
On Thursday, the Bank of England cut interest rates by 25 basis points without signaling additional easing measures, causing the pound to rebound by nearly 1% from its lowest point since August. Since September, the pound had been under pressure following hints from the Bank of England's Governor, Andrew Bailey, about potential aggressive rate cuts.
Kirstine Kundby-Nielsen, a forex strategist at Danske Bank, noted that political risk premiums around the pound are diminishing, especially as the Bank of England manages market expectations through gradual rate cuts. She predicts the pound could rise to $1.31 against the dollar and to 81 pence against the euro within six months.
Analysts believe political factors are bolstering the pound. The collapse of Germany's ruling coalition and possible early elections might change fiscal policies, increasing demand for British government bonds. Additionally, former U.S. President Trump's tariff promises could indirectly shield the UK economy from trade restrictions, given the UK's status as the second-largest global service exporter.
Options market signals also indicate further pound appreciation, as diminishing political risk premiums suggest improving market sentiment. This comes after the pound hit its most pessimistic level since March 2023 just a week prior.
Leveraged investors are poised to profit from purchasing pound-dollar call options, and companies are showing interest in buying pound-euro positions, according to Bloomberg reports.
While some, like Sam Zief, JPMorgan Private Bank’s Global Head of FX Strategy, believe the UK is benefitting from what he terms 'flatlining dividends' after elections and budget announcements, not everyone is optimistic about the pound's future. Jefferies' currency chief, Brad Bechtel, cautions that while the pound holds a unique position among G10 currencies, the dollar still has room to grow as the market anticipates fewer Federal Reserve rate cuts in response to Trump’s inflationary policies.
