EUR/GBP could head towards the low 0.8

Adam Cole, Global Head of FX Strategy at RBC Capital Markets, on GBP/USD and EUR/GBP

U.K. inflation declined further below the nation’s central bank’s 2% target in February to its lowest rate since 2009 as the prices increased 1.7%. What does this number mean for the U.K. economy and do you support BOE’s view to keep interest rates at a record low?

In my opinion, it has certainly helped to facilitate the Bank of England desire to keep interest rates at low levels for same time. Also with the inflation below the target it allows the bank to focus almost exclusively on this activity and how much capacity there is in the economy. Generally, we think their believe is that there is plenty of spare capacity; therefore, the bank will feel fully justified in keeping rates at the current low levels for a very prolonged period, in fact, longer than the market thinks.

What performance do you expect from the British Pound versus its major counterparts during the second quarter of this year?

We think it will be patchier. The story for 2013 and for the early part of this year was market expectations still catching up with a very strong U.K. economy. The U.K. economy still is resilient; however, I believe that expectations now have caught up and the news need to be that much better to make of a positive impact on the currency. We think going forward the Sterling is much more a range trade and investors should treat it opportunistically, rather than looking for the sustained uptrend that we saw through most of 2013. Nevertheless, we are not bearish but we no longer are looking for sustained bullish trend this year. It is a bit more opportunistic trade where you can sell rallies and buy dips.

What will be the main drivers for the Sterling during the second quarter of this year?

I see that the main driver will be the decisions made by BoE officials on its policy. At the moment, market thinks that the U.K. interest rates most likely will be raised around the early part of the next year. The Pound will advance and decline if that prospect comes near or slips further into the future. Taking that all into account, I think we now find ourselves in actually a quite unconventional world, where we are focusing on the central bank and the timing of the turn in the U.K. interest rates hike.

What are our forecasts for GBP/USD and EUR/GBP for the second quarter of this year?

Concerning the Cable, we expect that it will stay in relatively tight range between 1.65 and 1.67.

However, for the EUR/GBP we have a bias low, largely because of the fact that we see the Euro declining in general. The pair could head towards the low 0.8, that could be a patchy performance with big corrections rather than the straight line trend.