Geoffrey Yu, Senior FX Strategist at UBS AG, on U.K. economy and Sterling performance

The U.K. always has had structurally high inflation issues over the last few years, and the Bank of England is still trying to get to the bottom of this. Some of it could be price pressure issues, some of it could be productivity issues; however, the wider point is markets will continue to challenge forward guidance as long as inflation remains above the target. This looks still to be the case, but if forward guidance to be challenged, that actually is going to support the Sterling.

It is well-grounded if we look at some of other factors such as improvement in consumer spending, and also the sense of uncertainties that forward guidance has brought to corporates in terms of funding costs. However, the BoE and markets are probably very skeptical about the sustainability of current trends, mostly because it is driven by credits and also there are global headwinds as well, that is why the BoE is very cautious of maintaining forward guidance.

In the short term it is going to be twofold: firstly, there are going to be changes to the outlook in the U.S. as far as the monetary policy in the U.S. is QE driven because of the fiscal issues. Consequently, that would hurt the Dollar and help better performing currencies like the Sterling. On the Pound side we will continue to have a look at data, and also the prospects of the BoE moving forward its current guidance because data remain quite strong.

In the short term we do expect the Cable to remain supported; GBP/USD should be at 1.63 in a month and 1.61 in three months, therefore falling to 1.50 or so in the 12-month. We expect that EUR/GBP will stay at current levels around 0.84 pence per Euro, but in 12-month horizon it should return to 0.80.