British Pound (GBP) Forecasted Higher by TD Securities, GBP/EUR @ 1.25 in 3 Months, But USD To Be Supported
- Written by: Gary Howes
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By Rob Samson 
The British pound (GBP) has been tipped to advance against the US dollar in coming months say TD Securities who have the UK currency as one of their preferred picks of 2014.
Today we hear analysts at TD Securities have confirmed the GBP as one of their preferred currencies for 2014.
Indeed, the GBP/EUR rate is forecast to hit 1.25 against the euro by mid year.
Below are excerpts of the views held by TD Securities towards GBP:
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GBP to be underpinned
Strengthening domestic growth momentum has forced the BoE to call time on its rate forward guidance and focus market attention on the potential for rate increases in 2015; we think rates may rise earlier next year and that should help underpin the GBP - especially against currencies where policy prospects are more dovish.
Keep an eye on how MPC members vote
The BoE officially does not want to specify what and when "gradual" may be, but with the albatross of forward guidance lifted, we may now return to counting the votes of MPC members to glean risks.Weale favours a Spring 2015 hike while McCafferty favours Q2 2015. Pricing in further tightening and steepening into short sterling remains the path of least resistance, meaning gilts 5s10s and 10s30s flatter.
UK data remains constructive
The GBP has lagged the broader currency move against the USD over the past month although the case for sterling outperformance is perhaps a little more obvious than the EUR.
UK data trends have been somewhat more constructive.
Growth momentum looks very solid relative to the UK’s major economy peers and unemployment has fallen far enough and quickly enough to force the BoE to abandon its forward guidance policy.
We think the first hike will actually come early in 2015 which should add to GBP underpinning.
UK data trends have been somewhat more constructive.
Growth momentum looks very solid relative to the UK’s major economy peers and unemployment has fallen far enough and quickly enough to force the BoE to abandon its forward guidance policy.
We think the first hike will actually come early in 2015 which should add to GBP underpinning.
But, outlook for the USD also looks constructive
We remain broadly bullish on the USD outlook and expect stronger growth, the clear structural improvements in the US economy (reduced fiscal and current account imbalances) and higher longer-term interest rates to support the currency over the balance of the year.
Euro needs to see some really good data
Despite record low core inflation, weak credit growth and weak inflation expectations – all of which suggest the risk of additional ECB policy steps cannot be fully discounted at this point, the EUR seems to have benefitted from modestly better than expected GDP data for the end of last year.
With the Fed telling us clearly that there will be no policy adjustment and the ECB leaving the door ajar for further accommodation, we find it a little odd that the USD has been somewhat more sensitive to disappointing data than the EUR.
Still, we believe that the EUR will need to see very positive data in the next few weeks to sustain recent strength or extend beyond the late 2013 range peaks above 1.38.
With the Fed telling us clearly that there will be no policy adjustment and the ECB leaving the door ajar for further accommodation, we find it a little odd that the USD has been somewhat more sensitive to disappointing data than the EUR.
Still, we believe that the EUR will need to see very positive data in the next few weeks to sustain recent strength or extend beyond the late 2013 range peaks above 1.38.
Outlook for NZD and AUD is neutral
Our outlook for AUD and NZD is rather neutral as we expect positive domestic developments to be offset by the gradual rise in USD-supportive, long-term rates over the balance of 2014.
However, we do think there is a window for the AUD to reverse its trend decline against the NZD in the months ahead. The NZD has discounted the risk of tighter monetary policy from the RBNZ later this year but we feel the AUD OIS curve is underpricing the risk of the RBA nudging rates a little higher in the next few months as emergency levels of accommodation are no longer required.
However, we do think there is a window for the AUD to reverse its trend decline against the NZD in the months ahead. The NZD has discounted the risk of tighter monetary policy from the RBNZ later this year but we feel the AUD OIS curve is underpricing the risk of the RBA nudging rates a little higher in the next few months as emergency levels of accommodation are no longer required.