BofA Turns Cautious on British Pound Amid Rising Conflict Risks
Bank of America has adopted a more cautious stance on the British pound, warning that changing market perceptions of the Middle East conflict could put pressure on sterling in the near term.
GBP/USD Trade Idea: Downside Toward 1.30
The bank recommends selling GBP/USD in the low 1.34 range, targeting a decline toward 1.30. At the time of the outlook, the pair was trading around 1.3385.
Strategists highlight that a major shift has taken place in investor sentiment, with markets no longer viewing the conflict as temporary.
From Short-Term Shock to Prolonged Risk
According to FX strategist Kamal Sharma, the narrative has evolved from a short-term disruption to expectations of a more prolonged conflict.
This shift is pushing markets into a defensive, risk-off mode—an environment that typically weighs on risk-sensitive currencies like the pound.
UK-Specific Pressures Add to Sterling Weakness
The British pound is also facing domestic challenges. Renewed pressure in the UK government bond (gilt) market, combined with political uncertainty ahead of the May elections, is adding to downside risks.
Additionally, the relationship between UK bond yields and the currency is shifting. BofA notes that the correlation between gilt yields and GBP is turning negative, reflecting rising concerns over fiscal stability and political developments.
Fragile Sentiment Around UK Fiscal Policy
Market confidence in the UK’s fiscal outlook remains fragile, further weakening the case for sterling strength. These concerns are contributing to a more vulnerable outlook for the currency in the coming months.
US Dollar Expected to Stay Supported
At the same time, the broader macroeconomic environment is likely to favor the U.S. dollar. While the recent pace of dollar gains has slowed, BofA believes markets have not yet fully priced in the long-term impact of the conflict.
As tensions persist, the risk of prolonged disruptions in global energy markets increases, particularly if key infrastructure becomes a target.
Limited Upside Even if Tensions Ease
Even in a scenario where geopolitical tensions ease quickly, BofA expects markets to remain cautious rather than returning immediately to a risk-on environment.
The bank sees continued support for the dollar, with further upside potential in the months ahead.
Key Risks to the Outlook
BofA highlights several factors that could challenge its bearish view on the pound. These include a rapid resolution of the conflict or a smoother-than-expected outcome from the UK’s May elections, especially if there is no change in political leadership.
