Alvin T. Tan, FX Strategist at Societe Generale, on the UK economy and Sterling

We have indeed seen quite good economic numbers out of the U.K; and the run of positive data has been quite persistent over the last month or so. It is clear that the British economy is gaining momentum. With regards to the Pound, GDP growth is not as important as monetary policy and interest rates. The new governor of the Bank of England, Mark Carney, has already made it clear that BoE would be embarking on a forward guidance policy likely to be announced at the time of the inflation report on the 7th of August. The central bank will essentially promise to keep policy rates lower for a longer period of time, and the decision will possibly depend on a certain macroeconomic variable, perhaps the unemployment rate. However, the details are yet unclear at this point. Even though the U.K. economy is recovering, we can expect that the central bank to maintain an easy monetary easing on-going.

As the Fed will start to taper its asset purchases in September, the policy divergence between the U.S. and the U.K. will drive the Dollar higher against the Sterling. On the other hand, in terms of GBP/EUR there is a similarity of policies, where the European Central Bank is embarking on the forward guidance first announced by Draghi in July. Therefore, there is less policy divergence between the British Pound and the Euro, thus the direction of GBP/EUR will be more dependent on the economic conditions in the two areas. We expect the UK economy to outperform the euro area going forward, and this should drive Sterling higher against the euro.

To sum up, we see the Sterling losing ground against the Dollar over next three to six months; however, we do see the Pound gaining against the Euro over the same period.

I expect the U.K. economy to improve further, with a decent but not extremely strong recovery. If we look at the latest GDP data from the U.K., there was just a 0.6% growth from the previous quarter. Nonetheless, that is stronger than what we have seen in the Euro area.

There has not been much movement in the Cable since April. Current level of GBP/USD, which is 1.53, is the same level as it was four month ago. It has actually been rather flat for a few months. Even though the data from the U.K. has definitely surprised to the upside over the last two months or so, the fact is that we are going to have the central bank in the U.K. promising to keep rates lower for longer, whereas in the U.S. we are going to have the central bank starting to move away from its ultra-loose policy stance. Thus, in our view, relative monetary policy is moving in favour of the Dollar.

We expect GBP/USD to trade to 1.43, while EUR/GBP at 84 cents by the end of the year. As I have already mentioned, we believe that Sterling will lose its ground against the Dollar, but gain versus the Euro. For the longer term we see GBP/USD bouncing back to 1.50 and EUR/GBP down further at 82 cents.