© Ankita Dudani
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The Sterling has gained despite the Bank of England announcements for further asset purchase and the new measures to support the economy such as funding for lending and etc. While the ECB and the Fed have started to cut interest rates; the Bank of England at this point has not delivered rate cut and still keeps policy rate at 0.5%. Thus, the Sterling is staying resilient on the back of the Fed. There has been significant move lower in EUR/GBP as corporates are repatriating money out of the Euro. The UK is still a European country with AAA rating, but it is not part of Eurozone. It is holding relatively well despite what the BOE is announcing. Probably the pair could be a little bit overdone and there should be some downside risks for the Sterling as Bernanke has not indicated that the Fed will do more QE at the upcoming August meeting. Thus, that has been postponed until September, when probably more GBP/USD will come back into force. We are looking for some upside in the Cable, but not so much against the non G4 currencies. I think the Cable has a potential to underperform the currencies like as Aussie, Kiwi, CAD which have relatively higher yield advantage. It can sort of reverse its recent gains against the Euro and the Dollar.
What influence does the Eurozone debt crisis have on the British Pound performance?
For EUR/GBP 0.80 seems to resemble fair value, and we are looking for EUR/GBP to trade materially below 0.80. It has consistently been a downturn over the last year. Since the mid of 2011 it has been trading one way and the Sterling has continually outperform the Euro. It has been a safe haven due to pro-activeness from the central bank and from the government. At least the UK government has shown that they are willing to tackle the fiscal problems rather than 17 different nations within Eurozone struggling to really come up with some concrete plans, which are in the best interest of pretty much every country. That has been sort of the drawback and the reason why the GBP/USD has been on the uptrend. I think it has moved quite a lot and the UK economy is fragile as well and stronger exchange rate will have a dampening impact on the UK economy.
We think there could a potential for the Bank of England to start getting uncomfortable by the higher exchange rate of the Sterling. There was some indications in the minutes of July's meeting which was released earlier this week that the BOE is getting uncomfortable with the strength of the Sterling. If it starts to have a dampening effect on the economy then policy makers will start doing something to reverse it.
What is your forecast for GBP/USD for Q3 and Q4? What will be the main drivers for the Cable's performance in the future?
We have got GBP/USD 1.566 for the end of September and then heading lower towards 1.549 by the year end.
I think the main driver would be what the policy makers on both sides of the Atlantic would do to stimulate the US and the UK economy. The Fed's QE3 is pretty on the table of the FOMC for the Q3 and the BOE might be forced to deliver policy rate cut by 25 basis points from the current policy rate of 0.5%. Thus, I think it is going to be mostly about the central banks action from both the US and the UK, which will have the biggest impact on the Cable. Another reason would be further developments in Eurozone.