© Jonathan Webb
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We believe in some respect the data understated the UK's growth potential at the beginning of the year at the time our European economists were already pinpointing that there were signs of recovery. There have been a couple of key elements behind U.K. economic growth including the fact that fiscal policy has been tightened quite aggressively and possibly some of the negative impulses from that were starting to diminish. The second driver is that the U.K. housing market has started to recover. Thus, considering those two aspects and taking into account that the Eurozone's economy is performing a little bit better as well, which is boosting the nation's exports, the U.K. looks in a stronger position. We have been very optimistic on the U.K. growth, and the knock-on impact is helping the Pound. We see the surprise could still be on the upside for the U.K. growth, even though the forecasts have been raised.
What drivers would determine the U.K.'s currency performance in the foreseeable future?
The key element, in terms of the Sterling versus the Euro, is the outperformance of the British economy relative to the Eurozone. Our concern is that the Eurozone economy will disappoint next year which is a relative advantage for the Pound. Also, a lot of depends on expectations of the BoE future moves and what kind of decisions that they are likely to make. In the last Quarterly Inflation Report, policymakers actually brought forward their forecast of the first hike by a year to 2015. The U.K. economy could possibly outperform even these better expectations and the market may start to look for the Bank of England to move even earlier. We see that as a key support for their currency.
What are your forecasts for EUR/GBP and GBP/USD for the short and longer term and what kind of trend do you expect to see in the Pound's performance next year?
In the long term we forecast that EUR/GBP will head toward mid-70s level, and we believe that it is about its fair value. However, in the bigger picture, next year we can see some headwinds to start to grow for the Euro. We actually expect that most of the Sterling strength will come through the EUR/GBP side, thus we have a reasonably neutral forecast on GBP/USD, but we see EUR/GBP going lower.
In our opinion, the Pound will also outperform against such currencies as the Australian Dollar, the Japanese Yen and also against the Scandinavian currencies.