Bank of America analysts are advising investors to reduce unhedged exposure to the British pound even after a positive April for the currency. The bank points to a set of seasonal, volatility and political considerations that, in its view, increase the near-term downside risk for GBP.
April’s gains for the pound reflected several supportive forces. UK data over the past month produced strong upside surprises, boosting rate spreads that favor a stronger GBP. The currency also benefited from an improved risk environment and the familiar seasonal effect of UK-listed companies repatriating overseas revenues to meet sterling dividend payments.
Despite that recent strength, BofA’s analysis emphasizes that May has historically produced the reverse outcome. On a broad G10 basis, the pound has tended to underperform in May, and the bank characterizes May’s historical returns as a mirror image of April’s gains. That tendency is reinforced in periods when markets shift back to a risk-off stance, a move the bank notes has historically coincided with seasonal lifts in the VIX.
Political uncertainty is another concern for the analysts. With local elections scheduled for next week, the bank says political risk appears to be priced too low. They point to short-term implied volatility metrics as evidence: three-month volatility for both GBP/USD and EUR/GBP sits toward the bottom of their respective ranges on a one-year lookback.
Technical analysis on GBP/USD further bolsters BofA’s cautious stance. The pair has failed to push above a key Fibonacci resistance level, and the 50-day simple moving average is beginning to cross below the 200-day simple moving average - a pattern the bank describes as a bearish trend signal. Historical seasonal tendencies noted by the bank show GBP/USD has been the weakest G10 pair in May, falling 69% of the time by an average of 0.57%.
Given these factors, BofA favors a lower GBP/USD through May while 1.36 remains a ceiling. The bank identifies the next support levels at 1.3414 and 1.3381.
Key takeaways
- BofA recommends hedging GBP exposure despite April strength, citing seasonal and political risks.
- Market-implied volatility for GBP/USD and EUR/GBP is near the lower end of one-year ranges, which the bank views as underpricing risk.
- Technical indicators on GBP/USD are bearish, with the 50-day SMA beginning to cross below the 200-day SMA and failed Fibonacci resistance.
Sectors and markets affected
- FX markets, particularly GBP/USD and EUR/GBP.
- UK-listed corporates that repatriate foreign revenues to fund sterling dividends.
- Risk-sensitive assets that respond to shifts in the VIX and market sentiment.
Risks and uncertainties
- Political risk tied to local elections next week, which the bank considers underpriced and potentially market-moving for the pound.
- Seasonal increases in market volatility (VIX) that have historically coincided with weaker sterling performance in May.
- Technical breakdowns in GBP/USD that could accelerate moves toward identified support levels if resistance at 1.36 holds.