Above: File image of Bank of America offices, London. Image © Adobe Stock.

Bank of America has raised its Pound forecasts saying the UK currency will remain supported despite the UK economy's "grim fundamental outlook".

To be sure, Bank of America is amongst a list of investment banks that have been long-time bears on the Pound, expecting chronic underperformance in the economy as the UK economy stuttered for growth in 2023.

But, the economy has outperformed relative to consensus expectations, resulting in a run of data surprises that have spurned UK bond yields and the Pound higher.

"GBP's recent solid performance has been puzzling given the grim fundamental outlook of both weak growth and higher inflation. But despite weak data, UK numbers have been better relative to very low expectations," says a foreign exchange research note from Bank of America.

The report details Bank of America's mid-year currency market assessment that includes a number of forecast changes.

"We revise our EUR-GBP profile lower," says Bank of America. "We had previously expected a gradual move in EUR-GBP higher to 0.91 over the longer term, but we now look for EUR-GBP to focus around the 0.85 level through the end of our forecast horizon for the end of 2024."

(In Pound to Euro terms, the previous forecast of 1.0980 has therefore been revised higher to 1.1765.)

Bank of America has also revised higher its Pound to Dollar exchange rate (GBPUSD) profile. "Ultimately we have cable strengthening next year, as the USD weakens towards equilibrium," says Bank of America.

The Bank of England is meanwhile expected to remain a supportive force behind the Pound as it strikes to contain inflation through higher interest rates, say the analysts:

"In a similar perverse way that higher U.S. inflation was beneficial for USD by pushing the Fed to hike more than expected, persistently higher inflation has kept the BOE in a hawkish mode and supportive for GBP."

Bank of America economists expect the Bank of England to hike three more 25 basis point hikes to take Bank Rate to 5.25%.

"Also, we have more clarity of the post-Brexit regime, better relations with the EU, and a significant reduction of related tail risks," the analysis adds.

GBPUSD is now forecast by Bank of America to end 2023 at 1.24 and steadily appreciate to 1.35 through the course of 2024.

EURGBP is forecast to end the current year at 0.85 and hold sway around this level for the duration of 2024.