© Neil Mellor
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How would you evaluate the current performance of the Sterling versus its major peers?
The Sterling has become a difficult currency to predict largely because its fundamentals are a little awry. We had a series of very negative forecasts for the U.K. economic events during the autumn. However, things seem to change a little bit, and we have seen some positive data being released. I think the market has always been less incline to take a particular view about the Sterling against the Euro. That is why we had a long period when EUR/GBP has gone nowhere, and Sterling has actually dragged against the U.S. Dollar alongside the Euro. I think in the coming year the Sterling will probably be placed somewhere between the Euro and Dollar. By that I mean being Dollar-bullish for a while, I think on that basis GBP/USD will probably underperform this year. Conversely, we think that with the Euro being quite resilient, things are stacking up against it. The Sterling will probably end the coming year on a stronger note than it is currently standing on, somewhere between the middle of the two currencies.
Do you think the Bank of England may restart its stimulus programme if we see a fall in GDP in the fourth quarter?
It is entirely possible. There are mixed views on MPC right now. However, I think it is fairly clear that they are open to more stimulus should they deem it necessary and if GDP falls. Then that would certainly be one appropriate qualification for further stimulus.
Currently some of the FOMC policymakers consider ending QE in 2013. If that happens, what effect will it have on the Pound performance versus the greenback?
Actually, QEs have fairly limited impact on the Pound and there are a number of reasons such as recapitalization of the banks and some repatriation flows back to the Euro. But against the Dollar, I think the greenback wins anyway. Even if we see the QE programme being ended prematurely, I still do not think the Sterling would particularly post a strong rise against the Dollar, largely due to fundamentals that are coming in.
What is your short term and long term outlook for GBP/USD?
We expect GBP/USD to trade around 1.60 during Q1. We have got a growing momentum in the U.S. economic data; conversely the U.K. data is a little more back and forth. We have a fiscal cliff to negotiate, but I think the prevailing assumption is that the U.S. lawmakers will navigate their way through without doing much damage to the recovery.