© Adam Cole
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I think the Cable might be influenced to the extent when the Euro is under pressure against the Dollar, it would tend to pull Sterling down with it. However, I think if we look against the Euro then Sterling tends to outperform in periods when Eurozone stress is elevated. In some degree for international investors the Sterling is seen as a substitute for the Euro and it tends to be beneficiary against the Euro itself when the shared currency is under pressure. We see slightly mixed picture, but looking at EUR/GBP, the Sterling tends to benefit.
How would you evaluate the current performance of the Cable?
The Cable is taking a lot of its direction from a combination of EUR/USD and general market risk appetite. As the Dollar is traded strongly as safe haven, the Cable tends to follow general risk appetite. I assume analyzing EUR/GBP is not a very efficient way of expressing view on the Sterling independently, because like so many other currency pairs, the Cable tends to swing around by whether the market is buying or selling risks on a particular day.
What about British Pound performance against the Euro?
There is much more scope for Sterling to outperform going forward, because EUR/GBP itself tends to be a lot more neutral to general risk appetite, and the pair does not get swung around by global equity prices in a way the Cable does. Generally speaking, we are positive on the Sterling. I think that the market is fully priced for an additional round of QE in the UK, and the market is overpriced for the risk of the lower interest rates. We believe, there is a little danger of the Bank of England cutting interest rates from these levels and market price is in a quite high risk of that. Thus, I think the overall stance of policy is probably quite positive for the Sterling. We certainly see the break below 0.80 being sustained, moving in the longer term to 0.77 or 0.78 in EUR/GBP.
What effect do you expect from an aftermath of the EU economic summit on Thursday?
I think it will be quite limited, simply because the expectations are so low now. We are looking for a lot of concrete policy measures coming out of it. It is difficult to see much in a way of positive input for the Euro from that. Equally, I think the market has not priced in a lot in terms of expectations. Thus, the effect probably will not be negative either. I think it will be quite limited.
What is your outlook for these pairs for the short and long term?
For the Cable for the short and long term we are quite neutral. We have it trading at around 1.56-1.57 for most of the next 12 months, simply because I think the stories in the UK and the US are really very similar in many respects. Unless there is a very big move in risk appetite rather positively or negatively, it will keep Cable in a quite tight range.
For EUR/GBP we have much stronger sense of direction, where we think in the short term the pair will sustain the move through 0.80 possibly falling down to 0.79. Looking in 12-18 months forward, I think EUR/GBP move down to mid 0.70ies is realistic on the back of both Euro weakness and independent Sterling strength going forward from here.