Deutsche Bank Forecasting GBP Gains Against Euro, Australian and New Zealand Dollars

A new currency forecast from Deutsche Bank currency strategists has reaffirmed the institution's positive stance on the British pound outlook.

Deutsche Bank have confirmed in their latest FX Blueprint publication they remain bullish on the GBP, just as they have been since the start of the year.

The UK election outcome reinforces their commitment to backing sterling on the back of strong investment inflows into the UK and an economic performance that keeps Bank of England (BoE) hikes on track for being delivered towards the end of 2015. Rising interest rates remain front and central to the pound's fortunes.

Markets have backed this view taking the GBP higher against three currencies through May - a month that proved fruitful for those backing the currency. The end of month softness currently seen could have a lot to do with profit-taking and end of month flows and rebalancings.

Deutsche Bank's forecast suggest three currencies are likely to feel further weakness against sterling in the future, these being the AUD, NZD and EUR. For reference:

• The pound to euro exchange rate (GBPEUR) is trading below 1.40 once more, we see the pair at 1.3900 at the time of writing. A 2015 low of 1.2744 was reached in early May.
• The pound to New Zealand dollar exchange rate (GBPNZD) is at 2.1471, rallying from a low of 1.9280.
• The pound to Australian dollar exchange rate (GBPAUD) saw at its best level of the year above 2.0 take place this week, up from 2015’s worst of 1.8405. The rate has now fallen back to 1.9940.

UK Recovery Holds Up, GBP to be Supported

GBP continues to be very sensitive to the timing of Bank of England interest rate hikes, and economic data appears to be strong enough for the risks of an earlier rather than later interest rate rise occurring.

“Most importantly, wage pressure is finally materialising. If headline inflation, currently languishing at zero, begins to move north in line with the bounce in oil, the strength of the labour market will become increasingly difficult for the Bank of England to ignore,” says Deutsche Bank’s George Saravelos.

Also pointing to a GBP-positive interest rate rise is the election of the new Conservative government which may prompt fiscal tightening.

“This is already baked into the BoE’s forecasts on growth and inflation, but a resumption of austerity in 2016 provides an incentive to get policy exit out of the way sooner rather than later. Housing indicators are also rebounding after a year of moderation,” says Saravelos.

Buy Sterling Against the Euro, Aus and NZ Dollars say Strategists

From a strategic point of view Pounds may, “offer value against other FX too, especially where there is more scope for policy easing. Based on our bearish AUD and NZD calls as well as relative positioning, we like buying GBP against AUD and NZD in equal weights,” says Saravelos.

Regarding the pound to euro rate, GBP-EUR is forecast to rise to 1.47.

The prospect of a GBP rally against the three currencies identified by Deutsche Bank is made all the more possible as positioning on currency markets is not stretched. What this means is that market players are not so over-exposed to one bet that there remains very little capacity in the markets to chase that bet further.

Thus, there is a great capacity for markets to chase the British pound higher.

“The trade remains uncrowded. While dollar positioning has lightened substantially against other currencies since the start of the year, this is not the case for GBP where shorts have barely been pared, particularly from real money investors. We do not see valuation as a constraint,” says Saravelos.