Bank of America sees pound recovery after UK Budget as volatility eases

Investing.com - Bank of America expects the British pound to recover following the upcoming UK Budget announcement, according to a research note released Monday.

The financial institution notes that the pound has been "beholden to a binary event" since early September, describing the currency as being "tied to a string" while awaiting the Budget. Bank of America analysts indicate they "cannot recall similar occasions" where a currency has been so singularly focused on a future event.

Sterling has remained "agnostic" to both domestic economic data and global risk sentiment fluctuations during this period, the report states. While UK Budgets historically affected rates markets more than currency values, the September 2022 Budget changed this dynamic as "the Government’s fiscal headroom shrunk against the backdrop of lacklustre growth/productivity."

Bank of America maintains "a more constructive view on life after the Budget for GBP" contingent on the government adhering to its Fiscal Rule and increasing headroom. The bank’s positive outlook stems from expectations that "the release valve of the Budget passing will lead to normalizing in vol and skew."

The research note concludes that Bank of America’s base case scenario "should be broadly constructive for both GBP and Gilts" once the Budget uncertainty resolves.

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