British pound sterling (GBP) Forecasts for 2014: BK Asset Management Give Their Verdict
- Written by: Gary Howes
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The British pound sterling is one of the preferred currencies in 2014 over at currency trading house BK Asset Management.
The British pound (GBP) is forecasted to be one of the currencies to beat over the course of 2014 thanks to the relative strength of the UK's recovery. The positive view on sterling echoes that view held at Deutsche Bank who have upgraded their pound sterling forecasts.
We hear from Kathy Lien, Managing Director at BK Asset Management, as to why he firm is backing GBP in 2014:
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Don't play GBP strength via GBP/USD
"We expect the economy to gain momentum in the coming year but the biggest gains for sterling will not be against the dollar but other major currencies."
UK economic growth to underpin sterling
"2014 growth in the U.K. will be driven by housing, banking and a stronger global economy. The U.K. government did a fantastic job of propping up the housing market this year with the Funding for Lending Scheme and the Help to Buy program. Their pledge to keep interest rates low will keep mortgage rates cheap, driving property prices higher and attracting foreign investment in 2014.
"The U.K. government understands that reflating the housing market is the key to keeping the economy supporting and consumers feeling optimistc. After writing off significant amounts of bad debt, the banking sector is also expected to report stronger earnings and dividends in the coming year. A stronger global environment will solidify the recovery and help the U.K. economy reach the Bank of England’s 2.8% growth target for 2014, which is significantly higher than the 1.6% growth expected for 2013."
"The U.K. government understands that reflating the housing market is the key to keeping the economy supporting and consumers feeling optimistc. After writing off significant amounts of bad debt, the banking sector is also expected to report stronger earnings and dividends in the coming year. A stronger global environment will solidify the recovery and help the U.K. economy reach the Bank of England’s 2.8% growth target for 2014, which is significantly higher than the 1.6% growth expected for 2013."
Falling unemployment to push the hand of the Bank of England
Sterling will continue to be supported by an understanding that the Bank of England will have to consider raising interest rates sooner than they have previously indicated. Lien says:
"In August, the BoE believed that the unemployment rate would fall to their 7% unemployment rate threshold by the second half of 2016 but last month they accelerated this forecast by a year to Q3 of 2015. The unemployment rate is now only 0.4 percentage points away from this threshold and it could easily be reached by the middle of 2014. While the central bank has made it clear that 7% unemployment is a threshold and not a trigger for a rate hike, the rapid decline in jobless rate has encouraged investors to position for earlier tightening by the BoE."
"In August, the BoE believed that the unemployment rate would fall to their 7% unemployment rate threshold by the second half of 2016 but last month they accelerated this forecast by a year to Q3 of 2015. The unemployment rate is now only 0.4 percentage points away from this threshold and it could easily be reached by the middle of 2014. While the central bank has made it clear that 7% unemployment is a threshold and not a trigger for a rate hike, the rapid decline in jobless rate has encouraged investors to position for earlier tightening by the BoE."
Key Forecasts for the British Pound (GBP) in 2014
"Between the outperformance of the U.K. economy versus the Eurozone economy and the divergence in BoE/ECB monetary policy direction, we expect EUR/GBP to test 80 cents in the coming year. (GBP/EUR @ 1.25).
"While the key support level for the pair is the 2012 swing low of 0.7756, we don’t expect this level to be tested unless the Bank of England raises rates in 2014 (which is very unlikely) or the ECB cuts rates to negative levels (possible but not probable).
"Buying GBP/JPY on the other hand is both a U.S. recovery and global growth trade. Short-term resistance is at 175 but the more significant resistance level is 180.
"Finally, with the BoE holding monetary policy steady as the Fed tapers, higher U.S. rates should lend support to the greenback, offsetting demand for sterling. This means we expect GBP/USD to trade in a 1.67 to 1.60 trading range in the coming year."
"While the key support level for the pair is the 2012 swing low of 0.7756, we don’t expect this level to be tested unless the Bank of England raises rates in 2014 (which is very unlikely) or the ECB cuts rates to negative levels (possible but not probable).
"Buying GBP/JPY on the other hand is both a U.S. recovery and global growth trade. Short-term resistance is at 175 but the more significant resistance level is 180.
"Finally, with the BoE holding monetary policy steady as the Fed tapers, higher U.S. rates should lend support to the greenback, offsetting demand for sterling. This means we expect GBP/USD to trade in a 1.67 to 1.60 trading range in the coming year."