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Analysis from Bank of America (NYSE:BAC) shows Pound Sterling is on a multi-year journey to levels last seen on the day of the EU referendum.
The call comes amidst a steady uptrend in the Pound to Euro exchange rate (GBP/EUR) that saw it reach a new 2024 high on Tuesday at 1.2136 amidst an ongoing divergence in the direction of interest rates in the Eurozone and UK.
The rally could top-out soon, particularly if investors are front-running the European Central Bank's (ECB) decision to cut interest rates again on Thursday.
However, the medium-term uptrend should remain intact, says Kamal Sharma, FX strategist at Bank of America in London.
He says the Pound's outperformance is no surprise; he and his team stood alone in holding a constructive view on GBP at the start of the year, whereas the consensus was more gloomy.
The call was correct as the UK economy outperformed expectations, particularly in the first half of the year, helped by the strength of the service sector. This has meant the Bank of England has been far more reticent to cut interest rates than its peer, the ECB.
Indeed, the Euro's latest selloff comes ahead of Thursday's ECB rate decision, where another interest rate cut is expected. By contrast, the Bank of England is expected to leave rates unchanged next week.
Bank of America's constructive stance on the Pound contrasts with how it viewed the currency just five years earlier.
Sharma attracted media attention in 2020 when he said the Pound was behaving as an Emerging Market currency. At the time Sterling was enduring losses as the UK adjusted to life outside the EU, and investors saw the UK as being an unstable investment proposition.
However, the UK has entered a period of relative political calm, and investors have instead started fretting about German and French politics, where governing coalitions have collapsed in recent months.
The next year will see both nations head to the polls again to resolve political impasses, creating uncertainty for the Euro.
Political instability in the Eurozone's two largest economies comes at an inopportune time with Donald Trump threatening to raise tariffs on all U.S. imports. Economists point out that the Eurozone could be particularly vulnerable owing to its large manufacturing export base.
This leads many to suggest tariffs pose headwinds to the Euro in the coming months.
Sharma says the UK's dominant services sector will once again aid the Pound as it is "something that we think will help to insulate the economy from the threat of tariffs."
"Heading into the new year, we have made some adjustments to our GBP profile to highlight our conviction that further upside is likely over the medium term. There are risks, as always, to any forecast profile - deteriorating risk sentiment, higher volatility. But for now, we do not think that the UK Budget is an imminent threat," he adds.
There are concerns amongst economists that the new government's job tax raid announced in October is starting to weigh on hiring intentions, which can lead to a deterioration in the job market and prompt the Bank of England to accelerate interest rate cuts.
But Sharma is optimistic.
"Tt appears to us that a narrative has been shoehorned to explain GBP price action in recent weeks: that the Budget has sent warning signs for the sustainability over UK public finances. We disagree - GBP price action perhaps reflects profit taking towards the end of the year on what has been a very successful trade," he says.
Bank of America makes upward revisions to its forecasts with EUR/GBP expected to end 2025 at 0.80 from the previous 0.83 and 0.77 from 0.80 by end-2026.
For those looking at the exchange rate from a GBP/EUR angle, this is an upgrade from 1.2050 for year-end 2025 to 1.25.
The end-2026 forecast is raised from 1.25 to 1.30, a level last seen on the day of the UK's referendum on EU membership.
An original version of this article can be viewed at Pound Sterling Live