Bank of America Bearish on Pound Sterling as Conflict Outlook Deteriorates

Investing.com — U.S. banks are becoming more cautious about the British pound, believing that a shift in market perception of the Middle East conflict could put short-term pressure on the pound.

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The bank recommends shorting GBP/USD at the 1.34 low, with a target of 1.30. This advice comes as strategists say the market’s mindset is shifting significantly, with investors no longer viewing the conflict as a short-term event. GBP/USD is currently trading at 1.3385.

“The ‘short-term’ conflict narrative has now been replaced by concerns that the conflict could last longer,” said Kamal Sharma, head of the forex strategy team, adding that the market is increasingly moving toward a more defensive safe-haven environment.

This shift is seen as particularly unfavorable for the pound, which had performed relatively well during the early stages of the conflict escalation. Sharma noted that the UK bond market is under renewed pressure, coupled with political uncertainty ahead of the May general election, creating new headwinds for the pound.

The relationship between UK interest rates and the currency is also changing. The bank pointed out that UK bond yields and the pound are now negatively correlated, reflecting growing concerns over fiscal and political risks. With market sentiment toward UK fiscal policy described as fragile, the outlook for the pound appears increasingly unstable.

Meanwhile, broader macroeconomic factors are expected to support the dollar. Although the recent dollar rally has slowed, U.S. banks believe the impact of the conflict has not yet been fully priced into the markets.

“As the conflict persists, the nonlinear increase in the likelihood of long-term disruptions in energy markets is evident,” Sharma added, noting rising risks of attacks on critical infrastructure.

Even if the conflict de-escalates quickly, the bank remains skeptical about the market’s ability to swiftly return to a more risk-friendly environment. Instead, it believes the dollar will continue to be supported, “with further upside asymmetry over the coming months.”

Risks to this trade include a rapid end to the conflict or better-than-expected results in the UK’s May election, especially if the election proceeds smoothly without leadership changes.

This article was translated with the assistance of artificial intelligence. For more information, see our Terms of Use.