The picture of the monetary policy in the UK is well defined

Roberto Mialich, Director Senior G10 FX Strategist, on the GBP

How do you evaluate the current performance of the British Pound?

We remain relatively positive on the Sterling, because to our mind the BoE will start hiking rates after the summer. I anticipate that the first rate hike will take place as early as in November, which should continue to offer at least a cash into a downside for the GBP. However, the biggest part of this scenario is already priced in by the market. Thus, there may be some strong upside potential for the Pound, unless there is a significant acceleration in the pace of taking profits in the UK. We still expect the GBP/USD to have a chance of recovery, but not that much ahead.

Hence, at the end of the day, we can say that there is still a positive bias, but the potential is relatively limited. Most of the Sterling gains emerge, particularly against the greenback. As far as the EUR/GBP is concerned, we imagine a cross adjustment, also keeping in mind that a steady Euro performance versus the US Dollar will limit the fluctuation of the EUR/GBP. However, the resuming tension in the Portuguese banking sector may keep the EUR/GBP on offer in a very near term.

What will be the major drivers for the GBP throughout the year of 2014?

The picture of the monetary policy in the UK is well defined. What can shake the Pound and trigger some downside movement is whether the Bank of England softens its monetary approach in the upcoming months. Clearly, market has already priced in that the BoE will be the first one in the Big Four to start the tightening process, well in advance of the Fed and the ECB. Hence, if we will receive signals, that the board is back, after the release of Q2 GDP during the August meeting, we expect the rate hike to be postponed. However, that might be a potential risk on the back of a slightly less buoyant economic data release in the UK than the market was expecting to see. Given the mentioned facts, I assume that the Sterling might suffer. In that case, we should see the currency retreating back below 1.70 into 1.65 and the EUR/GBP to rally back above 0.80.

Nevertheless, this is not our base case scenario, because we expect that the BoE will acknowledge that the last batch of the economic figures were not that good. Apart from it, I do not think that there will be enough to trigger and a potential review of the monetary policy stands at the moment. There is still some time to calibrate a message for the market before the forthcoming November rate hike. However, I do not believe that there will be a significant divergence from this scenario.

What is your short and long term forecast for the GBP/USD and the EUR/GBP?

Talking about the short-term perspective in the EUR/GBP, basically we anticipate something between 0.78-0.82 going forward. In a longer perspective, we are still expecting a consolidation of more likely above 0.80 rather than below. As for the GBP/USD we imagine something between 1.73-1.74 to be the peak for the end of this year.