February: Sterling set to shine in 2014

While we remain confident that eurozone inflation will continue to come in on the soft side and add to pressure on the ECB for more easing, we have become somewhat less certain that the ECB in fact intends to act symmetrically when inflation is supply-driven as is largely the case at present. However, as our base case remains more easing in March (or April), we keep the view that the ECB will add to EUR weakness on a 3M horizon. Longer term, our call for a softer EUR/USD remains driven by our view that the Fed intends to end tapering this year but the USD part of the story will be a prolonged and gradual process. Also, we stress that recent weakness in US data hints at the risk of a tapering pause later this spring which together with a lack of ECB reaction could reduce EUR/USD downside potential markedly. Nevertheless, we now see EUR/USD at 1.35 in 1M and have kept our profile unchanged, thus still seeing the cross at 1.26 in 12M – albeit we stress, however, that risks are increasingly on the upside.

We have upped our near-term AUD/USD forecasts a little to 0.88 in 3M (from 0.87) as RBA’s determination to send AUD lower has now been removed; we still see downside this year though, as a weakening China takes its toll. We have kept our NZD/USD and USD/CAD forecasts unchanged, however. The RBNZ will initiate a hiking cycle soon but much is already priced, thus capping upside in the cross, whereas the BoC is turning increasingly soft and is now explicitly worried about a still strong CAD.

We have revised our EUR/NOK marginally lower, expecting that the cross will drop to 8.20 (8.25) on a 3M horizon. The move lower reflects the higher Norwegian inflation and renewed support to the NOK from relative rates. We still expect that EUR/NOK will drop to 8.00 on a 12M horizon.

We have kept our EUR/SEK forecast unchanged, but highlight that short-term risk is tilted to the upside for EUR/SEK due to our view that inflation and growth data will come in on the low side of expectations over the next couple of weeks. •Strong UK numbers, Bank of England moving closer towards the first rate hike and further easing from ECB means that we still believe that EUR/GBP will edge lower throughout 2014. We forecast that EUR/GBP will drop to 0.81 (0.82), 0.80 (0.81) and 0.79 (0.80) on a three-, six- and 12-month horizon.

The sell-off in the Emerging Market currencies has continued. This is obviously reflected in our forecast for the EM currencies where we in general have moved our short-term (3M) forecasts in a more negative direction reflecting the weaker spot levels than a month ago. However, overall we have not made any major changes to our fundamental views of the EM currencies. As a consequence, we have not made any major changes to our longer-term forecasts (6M and 12M). However, note that we have become more negative on particularly the Russian rouble.