UK bond situation has stabilized
Following the UK (and global) yield blowout and resulting FX-rates decoupling in January, markets have calmed down. As we had expected, markets returned the respective risks to the back burner—to (maybe) bubble up another day. This made way for another risk: US tariffs. While we do not think UK exports to the US are a focus of the Trump Administration, the GBP remains a highly cyclical currency and will be susceptible to a worsening in global risk sentiment—should a trade war of any kind materialize.
The right kind of carry?
Both the UK and US economies have seen similar inflation dynamics of late, putting their central banks in the same hawkish bucket. However, on the growth side, the differences are a bit more stark: US growth has steamed ahead, while UK growth has been stagnant. As a result, we think the Bank of England (BoE) will cut rates by more than the Federal Reserve in 2025 after all. Risks regarding the UK’s fiscal and current account situation remain and pose a downside risk to GBP—in case of “the wrong kind of carry” whereby FX and rates can decouple as we saw in January. However, we think USD-negative factors will outweigh these risks in the second half of the year and push GBPUSD higher towards 1.30 by the end of our forecast horizon.
Investment considerations
Prospects
From current levels, we believe the pair will go lower in the remainder of H1 before going higher in H2. We also like upside selling yield pickup strategies.
Boundaries
1.30 remains a major resistance level while, to the downside, we watch support at 1.22.
Risk factors
Were Trump-related trade war risks to dent risk sentiment more broadly, GBP would suffer as a high-beta currency. A resurfacing of UK idiosyncratic risks could have a similar effect. However, should the US economy weaken more sharply than we expect, GBPUSD could have more upside, also in the short term.
GBPUSD rallied strongly from its January lows
