© Geoffrey Yu
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The Bank of England is clearly worried about the situation in Greece, but so far it is too early to tell whether the effects are strong enough to delay their current trajectory directly. The Sterling has been strong against the Euro, but if the disinflationary pressures are not strong enough to offset the demand gains from wages and growth, the Bank of England will not change its policy.
The pressure for any imminent need for a rate rise has been removed by the fact that inflation remains near historic lows, at 0.1%. However, a lot of analysts believe the committee must also consider the path that inflation will take over the next couple of years. Do you agree with them?
We agree that the labour market will tighten and gradually cut slack. Moreover, fiscal drag has also been factored into the economy, and we do not see any material effect on the Bank of England from the budget.
What will be the major headwinds for the Pound until the end of this year and what are your forecasts for EUR/GBP and GBP/USD for the same period?
I believe the major headwinds include contagion from Greece and global growth. We see 1.55 averages for the GBP/USD currency pair for year-end, while the EUR/GBP will struggle at around 0.7 levels.