© Melinda Burgess
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No, I think at this stage we expect policy makers to continue to have a neutral bias to their monetary policy stance. They halted their quantitative easing programme in November, but the fact that they have transferred interest payments to the Treasury from the BOE's QE suggests that there is a form of easing still going on. Given that we expect that the economy is likely to continue to have a weak outlook going forward, with only a sluggish recovery in 2013, we think their monetary policy stance will continue.
Do you expect the U.K. will be able to maintain its AAA rating?
I think at this stage, where we are at the moment, given the autumn statement from the Chancellor George Osborne, the U.K. will continue to have AAA rating. However, obviously very much depends on whether the targets for reducing the deficit are being met.
What is your outlook for the GBP/USD and EUR/GBP for the end of this year?
At the end of 2012 we expect GBP/USD to trade at 1.5780, while our forecast for EUR/GBP is 80.50.
What trend do you expect in these pairs next year and do you think the Sterling will be able to continue to serve as a safe haven proxy for the euro?
As to GBP/USD, we do think that the Sterling will struggle over the coming year. The U.S. Dollar should feel some benefit from a relative recovery of the nation's economy compared to the U.K., as we do expect that the U.K will have a very sluggish recovery next year. In terms of the outlook for monetary policy, we expect that the Fed and also the Bank of England will continue to have an easy monetary policy stance. Since we have a fairly weak outlook both for the U.K.'s economy and the Sterling, we anticipate the Sterling to be heading towards the low 1.50's versus the U.S. Dollar over the course of the year.
However, we see the Sterling will fare slightly better against the Euro over the course 2013, largely as a result of weak Euro rather than strong Pound. We think the Euro will come under some pressure as programme countries such as Greece, Portugal and Spain do have a risk that they will miss their deficit-reduction targets next year. Therefore, you can see some worries over a Greek exit from the Euro re-emerging in 2013, which should put a downward pressure on the Euro. We do expect very sluggish growth in the Eurozone, with peripheral countries in particular struggling to show any growth which will make it harder for them to service their debt. Fiscal and growth worries in the region should see EUR/GBP heading down towards 0.77 level by next year.