Bank of America has issued a fresh assessment on the British pound, warning that the currency’s recent gains may not be sustainable as the UK economy shows signs of losing momentum. In a note to clients seen by UKPulse Media, the bank’s foreign exchange strategists argued that while sterling has benefited from a weaker US dollar and improving risk sentiment, underlying domestic fundamentals are deteriorating.
The pound has climbed roughly 3 per cent against the dollar since the start of June, trading around $1.32 on Friday. However, Bank of America points to a slowing services sector, persistent labour market softness and subdued consumer confidence as factors that could cap further appreciation. The bank’s analysts wrote that “the growth differential that has supported GBP is narrowing, and we see limited scope for a sustained rally from here.”
For UK investors and pension holders, the outlook matters because a weaker pound would increase the cost of imported goods — pushing up inflation — while reducing the sterling value of overseas assets held in pensions and investment portfolios. The FTSE 100, which derives around 70 per cent of its revenue from abroad, tends to benefit from a weaker pound, but domestically focused sectors such as retail and housebuilding could suffer from higher input costs and squeezed household spending.
The warning comes as markets increasingly bet that the Bank of England may cut interest rates sooner than previously expected. Money markets are now pricing in a first quarter-point rate reduction by November, with further cuts likely next year. Lower rates typically weigh on a currency by reducing returns for foreign investors, adding another headwind for sterling. “The market is pricing in more BoE easing than the Fed or ECB, which should keep GBP under pressure over the medium term,” the note added.
Analysts at other investment banks have offered a mixed view. Some argue that political stability following the general election and a recovery in business investment could support the pound, but Bank of America’s caution reflects a broader concern that the UK’s economic recovery remains fragile. For now, currency markets are likely to remain sensitive to upcoming data on GDP growth, inflation and employment.