Get ready for a bold prediction that might just turn the financial world on its head! Bank of America dares to disagree with the crowd and backs the British Pound's rise against the Euro in 2026.
In a recent media briefing, Adarsh Sinha, FX and Rates Strategist at BofA, shared an intriguing perspective. He believes that the consensus view, which predicts further underperformance for the Pound Sterling, might be short-lived.
"We're happy to take the other side of that," Sinha confidently stated.
He argues that contrarian ideas can quickly gain traction as traders seek new anchors, and the Pound could be one such winner.
But here's where it gets controversial...
The Pound has already seen a 5% decline against the Euro this year, and most analysts are expecting this trend to continue. The Euro's strength is attributed to expectations of an economic rebound in the Eurozone and the end of the ECB's rate-cutting cycle. On the other hand, the Pound's decline is linked to economic disappointments and uncertainties surrounding the UK's fiscal policy.
And this is the part most people miss...
BofA believes that the recent UK budget, which passed without causing a stir in FX and FI markets, could be a turning point. They argue that the risk premium demanded of the Pound might dissipate, leading to a relief rally.
"This Budget has the buy-in from the OBR, and the Chancellor has reinforced the commitment to keep the Fiscal Rule and raise the Fiscal Headroom. These are important anchors which should lead to a GBP relief rally," BofA's year-ahead outlook states.
As a result, BofA forecasts EUR/GBP at 0.84 by year-end, translating to a pound-to-euro conversion of 1.19.
But wait, there's more!
BofA also predicts a gradual decline for the US Dollar, following its largest annual decline since 2017. FX strategist Alex Cohen highlights a potential risk for the greenback: the building risk premium surrounding the Fed's independence and its potential role under a new Chair tied to White House policy.
"The administration is clearly discussing affordability through the lens of lower rates," Cohen explains.
And in an even bolder move, BofA bets against the Japanese Yen, contrary to the strong consensus view for next year.
"Japan is seeing structural outflows... Inflation is no longer zero, and when inflation is no longer zero that's a problem," Sinha points out.
With households and corporates diversifying their cash holdings outside Japan, Sinha believes the Yen will remain structurally weak.
USD/JPY is forecast to end the year at 155.
So, what do you think? Are you ready to swim against the consensus with BofA? Or do you have a different take on these currency predictions? We'd love to hear your thoughts in the comments below!
