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FX Crossroads

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GBP set to weaken further over summer

Thu, Jul 10 2008, 09:45 GMT
by Danske Research Team

Danske Bank A/S

Summary and conclusions

• • In this edition we focus on sterling with an emphasis on the July Bank of England (BoE) meeting and the recent positive shock to the UK flow of funds.
  
• • In the first article, we provide a preview for the upcoming BoE meeting on 10 July, when we expect the base rate to be left unchanged at 5.0%. This is also widely expected in the market; all 72 polled by Reuters last week expected no change. The market reaction should be limited.
  
• • In the second article, we consider the puzzle of how the recent large positive shock to the UK flow of funds can coincide with broad-based sterling weakness.
  
• • Overall, we still see the fundamental case for a weaker GBP and we expect that EUR/GBP will soon test new record-highs, having range traded for some time. Technically, a break-out of the current EUR/GBP triangle (peak 0.81 (16 April), through 0.7765 (2 May)) has the potential to send the pair towards 0.82, our three-month forecast, and possibly even beyond - perhaps as high as 0.84.
  
• • Finally, we provide an update on the latest IMF FX reserve data, which shows that world reserves are still growing fast and that there is yet to be seen any evidence of a marked reduction in the share held in USD.
  
• • FX Crossroads is published every second Wednesday. The next publication date is 23 July 2008.

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Published on  Thu, Jul 10 2008, 09:48 GMT




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