After being sold for most of the year on the back of rising fears over the UK exiting the European Union, the GBP has stabilised of late, mainly due to the past few weeks’ polls suggesting less probability of a Brexit materialising. In fact, that outcome remains our house view and our main argument for expecting the GBP to continue trending higher over the coming few quarters.
It must be noted too that after the EU referendum investors’ focus is likely to shift back to fundamentals as a driver of rate expectations and the currency. With domestic conditions constructive and as medium-term inflation expectations – as measured by 5Y forward breakeven rates – have been well supported close to 3%, there is room for rising monetary policy expectations.
As such, we expect GBP/USD to end the year closer to 1.51 and 2017 at 1.55. The higher forecast profile is also based on a slight downgrade of the USD. EUR/GBP should end this year closer to 0.74 and next year 0.72.
In both cases it will be due to diverging monetary policy expectations. It must be remembered that the continuing global growth uncertainty is likely to prevent the currency from appreciating more considerably.
Ahead of the 23 June referendum, some downside risks related to next month’s inflation report or renewed fears over a Brexit cannot be ruled out. We believe such corrections should prove a buy.
CACIB targets GBP/USD at 1.44, 1.49, and 1.51 by the end of Q2, Q3, and Q4 respectively.
CACIB forecasts last updated on eFXplus on 5/5.
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