RBS pound sterling forecasts for 2014: GBP/EUR Higher, GBP/USD Lower

We hear from RBS who have told clients they are forecasting differing fortunes for the British pound in 2014.

Key to the RBS foreign exchange stance is the prediction that the US dollar will rise. This is not necessarily a surprising viewpoint as it falls in line with market consensus.

The withdrawal of US central bank stimulus is seen as the catalyst behind the USD appreciation, but where will the currency end up against its peers?

The pound appreciated by 9% against the dollar over the second half of 2013, with GDP/USD peaking at 1.66 in December on the back of the strong performance of the UK economy.

It also strengthened against the euro, closing the year at €1.20. But can this strength continue?

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The latest exchange rate forecasts issued by RBS suggest that gains are likely to be realised vs the Euro, but not against the US dollar.

Commenting is RBS analyst David Fenton:

"Despite the two rate cuts by the ECB, the euro appreciated against the dollar, rising to $1.38, the highest rate in more than two years, as the economy of the single currency area stabilised.

"For the time being, the decision by the Fed to ‘taper’ its asset purchase programme has had little impact on the major currencies.

"This reflects the effort that both the Fed and the BoE have been making to signal they’ll keep rates low for longer - well past the point where their respective unemployment thresholds are reached.

"Markets currently expect the BoE to start raising rates earlier than the Fed (Q1 2015 vs Q3 2015).

"This view seems to be based on the assumption that there is less spare capacity in the UK, which may force the BoE's hand to fend off inflation.

"We're not convinced, and expect markets to rein in their expectations for Bank rate.

"Growth will be the key word in both regions. Without the powerful fiscal headwind it faced in 2013, we expect the US economy to power ahead in 2014, which will support the dollar against sterling.

"Sticking to fundamentals, we believe economic conditions will remain challenging in the Eurozone despite recent signs of stabilisation.

"We therefore expect sterling to continue to appreciate against the euro with GBP/EUR rising into the mid 1.20s next year, towards its fair value."