© Ankita Dudani
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We have got a trade recommendation of selling the Euro and buying the Sterling. We think that the UK economy is performing relatively well, at least compared to the Eurozone; however, not as good as the US economy over the recent months. We suggest looking for low 80-ies over the coming 2 to 3 months.
Currently we see a Sterling selling off against other currencies. We expect the Cable to be heading towards the 1.55-1.56 within next 2 to 3 months. One of the important technical levels that we think the Cable tends to close, looking at the pair on a weekly basis, is the 200 day moving average, which has not been broken since the start of the financial crisis in 2008. Last week we were on the edge of breaking it, but we failed to do so. This reiterates the downside risks for the Sterling. That is something that we think will cap at least upside gains in the EUR/GBP and other Sterling crosses. We still think the declines in EUR/USD will outpace the declines in the Cable, hence why we look for EUR/GBP downside.
What is your forecast for the second quarter and for the end of this year?
For the Cable for the end of Q2 we have 1.5520, and for the end of the year it will come back to 1.4930. that is in line with a weaker US Dollar in the second half of the year. We think that during that period of time fiscal concerns in the US will come back into focus and will have a negative impact on the Dollar, as a result pushing the Cable higher and other Dollar crosses as well.
What is the sustainable level of the Cable for the UK economy?
It depends on what time frame is considered - whether we look over the 20-30 years or over the next couple of months. I think 1.60 in near term happens to be a decent level for the Cable. Around this level people start selling the pair. Corporate structure looks for downside risk in the Cable. Since the beginning of 2001, the Ca-ble has been pretty much flat and it has been well contained between 1.52 to 1.67-1.68.
Our latest fair value model, which uses short-term factors such as rate spreads, risk appetite to see whether there are any discrepancies between the current drivers and where the actual support is, suggests that the Cable is overvalued and we think it should be around 1.55, though. I think anything between 1.55 and 1.60 will hold the Cable.