© Michael Sneyd
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In the recent Bank of England's press conference officials announced quite strong economic forecasts for 2014, as they are looking for growth to accelerate to more than 3% this year. Policy makers expect that with the current interest rates, the unemployment rate will fall towards 6.3%, and it seems that it has a potential to break the 7% threshold very soon. However, interest rates are going to be kept on hold for some time.
In terms of market pricing, market participants are expecting that rates could be raised in Q1 2015, in line with our economists' forecast. However, if the U.K. economic data does remain very strong over the next couple of months, then we might see the market beginning to price in rate hike sooner than forecasted, thus at the end of 2014. That could continue to give some support to the Pound.
U.K. housing market and construction sector has been growing for a while and the growth should not stall as there is a shortage of home on the market. What is your opinion on the current situation in U.K.'s housing market? What kind of levels could the prices reach?
The housing market has been one of the main beneficiaries of the forward guidance the Bank of England put in place last August. In terms of policy perspective, the BoE is not looking just for housing credit to increase, but also for business credit to pick up. The central bank is looking to keep rates low until we see a rebound in U.K investment spending. With business investment being slightly slow paced and the rebound, which we have seen in the housing market, it means that there could be further cheap credit available to the housing sector. That combined with the shortage of home available for sale, house prices are likely to remain on an uptrend at least for over the next year or so, until the BoE starts to look towards hiking rates.
What will determine the U.K. currency's performance this year and what kind of long term trend could we see?
We expect the Sterling to continue its strong performance this year. We see that growth in the U.K. is going to be one of the most rapid among the G-10 nations. That coupled with the fact that rate hike expectations for early 2015 are likely to continue to be priced in, which should be very positive for the Pound. We would not recommend positioning the Pound against the U.S. Dollar as we think that the Cable is probably reaching its highest level at the moment. Given that the Federal Reserve Chairman Yellen was very clear and signalled that the Fed will be continuing their path to tapering that should keep the Dollar supported. We think the way it plays for Sterling's strength this year is by short EUR/GBP.
Against other major currencies, we do expect that the Pound will be one of the best performers. The only currency within the G-10 that is likely to do as well as the Sterling is probably going to be the U.S. Dollar. We are seeing a trend this year where central banks are starting to look towards the exit their expansionary monetary policy. The U.S. and the U.K. are likely to be the economies, where their currencies strengthen this year and we think that the U.S. Dollar and British Pound will do very well. This comes in contrast to central banks that are looking to ease this year, with the ECB and the Bank of Japan most likely keeping the policy very loose.
What are your short and longer term forecasts on GBP/USD and EUR/GBP?
We have a short recommendation on EUR/GBP as the pair is looking to reach 0.80 over the next couple of months, and we have a forecast of 0.76 by the end of the year. If we look how investors are positioned, we see only few market participants holding short EUR/GBP position. We expect that scope for this position to become more crowded. In our opinion, the ECB will be the main driver for this pair with its easing policy over the next couple of months. Technicals are very supportive for the pair to decline and relative fundamentals between the Eurozone and the U.K. are also very indicates that EUR/GBP is going to move to the downside.