Is the rise of the British pound exposing underlying weaknesses? Multiple investment banks turn bearish on the UK pound's outlook

The British Pound rebounded in the short term driven by positive fiscal budget expectations, but whether this rally can continue remains uncertain. As of the latest report, the GBP/USD is down 0.08%, quoted at 1.3227, after briefly touching 1.3269, a nearly one-month high. However, behind this upward momentum lie deep concerns.

Short-term rebound masks long-term difficulties

Morgan Stanley strategist David Adams and others explicitly stated in their latest report that although the GBP experienced a short-term rally after the UK budget announcement on , this rise lacks substantial fundamentals. Investment banks have revoked their previous bullish ratings on the pound and adopted a cautious stance.

Analysts believe that the attractiveness of the GBP against the dollar is waning. The key reason is that the correlation between the pound and the stock market has fallen to near zero, and domestic positive drivers are evidently insufficient. Morgan Stanley noted, “As the budget dust settles, the GBP may only have one last rally—stemming from hedge position unwinding—but fundamentally, the reasons to hold long positions in GBP/USD are dwindling.”

Shift in interest rate cut cycle, growth becomes key

From a long-term perspective, the Bank of England’s easing cycle could bring a turning point. As policy easing deepens, government fiscal space will expand, and lower borrowing costs are expected to stimulate consumption and investment activities.

The strategists further pointed out that as the BoE’s rate cut cycle approaches its end, economic growth will gradually replace arbitrage trading as the main driver of the pound’s direction. If the rate cuts genuinely improve economic prospects, market pessimism toward the GBP could see a significant reversal.

Fiscal fragility remains a hidden risk, investment banks remain bearish

Jefferies, another investment bank, also believes that the recent rise of the pound will be short-lived, with further downside potential. Economist Modupe Adegbembo pointed out that the UK’s ongoing fiscal fragility causes markets to adopt a steep decline strategy, and the market is still assessing risks from fiscal mismanagement and structural imbalances.

Overall, while there is some technical rebound space for the GBP in the short term, weak fundamentals, fiscal difficulties, and policy uncertainties intertwine, making this rally difficult to sustain. Investor confidence in the GBP outlook remains limited.