The Pound has recovered against the US Dollar, but BofA warns that fiscal uncertainty and pressure on long-dated Gilts could unsettle Sterling heading into autumn.
Pound Sterling has enjoyed a decent summer recovery against the US Dollar, but the mood could become rather less comfortable once markets turn their attention to the autumn Budget.
The Pound-to-Dollar exchange rate (GBP/USD) gained 1.75% in July and briefly returned above 1.35 before easing to around 1.3436.
The Pound-to-Euro exchange rate as been steadier, with GBP/EUR holding close to 1.1680 after a 0.72% July gain.
Bank of America remains constructive on the Pound over the medium term, but says it would prefer to wait for “greater clarity on UK policies”.
That qualification matters. The Bank of England is showing no urgency to move rates, while investors are increasingly looking beyond monetary policy towards the government’s fiscal arithmetic.
The British Pound recovered strongly against the Dollar late last week, although GBP/EUR remained under pressure.
BofA said the July Bank of England meeting was “broadly balanced”, with policymakers keeping the door open to a rate hike without signalling that one was close.
Governor Andrew Bailey was “fairly explicit that nothing suggests that the BoE is edging towards a hike”, according to the bank.
BofA expects rates to remain unchanged through 2026, but says the risk is still tilted towards a later increase if energy prices stay high and second-round inflation effects emerge.
That should offer Sterling some support. The problem is that the bond market may soon have other things to worry about.
“Tricky fiscal arithmetic, with the Budget date announcement potentially coming as soon as mid-August, will be another key domestic driver for the Gilt curve steepness heading into autumn,” BofA said.
The bank expects the gap between short- and long-dated Gilt yields to widen and warns that “fiscal and political risks can cheapen Gilts versus swaps”.
In plain English, investors may demand a higher premium to lend to the government if the Budget raises fresh questions over borrowing, tax plans or spending credibility.
That is rarely a comfortable backdrop for the Pound.
Pound Sterling remains in the lower half of the major-currency table over the past month, despite recovering against the Dollar.
British Pound Outlook: Fiscal Risk Replaces the BoE as the Main Threat
There is another, more technical headwind.
BofA’s month-end rebalancing estimates pointed to Sterling selling after UK assets outperformed during July.
“Broad outperformance in UK assets points to GBP selling, consistent with current price action,” the bank said.
Its conventional global portfolio model showed scope for rebalancing out of Sterling at around 1.5 standard deviations — a fairly meaningful signal, even if such flows tend to be temporary.
Pound Sterling has gained against the Dollar over the past month but underperformed several commodity and Asian currencies.
The bigger issue is what happens once the summer lull ends.
Pound Sterling has held up because UK rates remain restrictive, the Bank of England is in no rush to cut and the Dollar has lost ground. Yet those supports may count for less if the autumn Budget prompts another sell-off in long-dated Gilts.
BofA’s view is not outright bearish. It still describes its medium-term bias on the Pound as constructive.
But the message is clear enough: the summer rally has bought Sterling some breathing space, not immunity from the UK’s fiscal problem.
The Pound is higher against the Euro and Canadian Dollar in 2026, but remains weaker against the Australian and New Zealand Dollars.
