Pound and Dollar Forecasted to Outperform Rivals in 2015: BUY Any Dips on GBP Say Credit Agricole

The key to the expected rise in value of the USD and GBP is the economic outperformances of their respective economies; particularly against a stagnanting eurozone.

UK interest rates are forecast to be raised in early 2015 while those in the United States are predicted to rise towards mid-year.

In the immediate-term the repositioning / GBP long squeeze following the Scottish referendum has ended and sterling has finally entered calmer waters:  

For reference, at the time of writing the following conversions are noted:

• The pound to dollar conversion: 1 GBP buys 1.6293 USD, the exchange rate is 0.29 pct lower when compared with last night's close.
• The pound to euro conversion: 1 GBP buys 1.2791 EUR, the exchange rate is 0.03 pct higher than when compared to the previous day's close.
• The euro to dollar conversion: 1 EUR buys 1.2739 USD, the exchange rate is 0.32 pct lower.

Be aware: All forex quotes here are taken from the wholesale spot markets; your bank will levy a spread at their discretion. However, an independent FX specialist will undercut your bank's offer, delivering up to 5% more currency in some instances. Learn more.

British pound forecast to outperform rivals

From an FX point of view, the current divergence being witnessed in economic performance, inflation and central bank policy intensions, set the scene for significant currency adjustments and movements.  

"In the UK, the focus is still on the referendum and constitutional fall out, but as long as the economy stays on its current trajectory, the BoE will be normalizing rates early next year.  GBP along with the USD will be the outperformers," says Jonathan Webb at Jefferies.

In the near-term Jefferies reckon market attention will continue to move away from the politics that we saw as being important over the course of the Scottish referendum.

A return to focussing on the UK's economic performance will now take place, and this will likely boost GBP:

"We think this impact would soon be dissipated by signs of continued strength in the UK. This would bring focus back onto the BoE rate normalization that should start in the first half of 2015."  

Buy the Pound Sterling on Dips

According to analysts at Credit Agricole those with an interest in the forex markets should buy the GBP on any dips as weakness is expected to be short-lived.

Manuel Oliveri at Crédit Agricole says:

"We expect the GBP to remain a buy on dips, in particular against currencies such as the EUR and the CHF.

"During the past few weeks political weighed on the the currency, regardless of stable BoE rate expectations. Given last week’s positive Scotland-related referendum results, investors’ focus should shift back to more constructive UK growth prospects to the benefit of the currency.

"As this week’s data calendar is relatively empty when it comes to market moving events, BoE Governor Carney’s speech in Wales on 25 September should be the currency’s main driver. From a macro perspective, the latest development suggests little risk of him turning more dovish."

All of the above stands in contrast to the ECB or SNB which remain accomodative when it comes to policy creating the necessary divergence to prompt further GBP advances.

Why the Dollar is Forecast to Advance

In the current circumstances, subdued global inflation is likely to be positive for the US dollar for the following reasons say Deutsche Bank:

1. It will encourage unorthodox easing measures in the likes of the EUR area and Japan that will stand in contrast to a slower Fed tightening cycle.

2. Similarly the more Central Banks like the ECB and BOJ are faced with a deflation threat, the more likely they are to encourage a weaker currency through less than subtle verbal ‘intervention’.

3. Lower commodity prices are strongly correlated with positive terms of trade shocks for the US.

4. Strong rates of return for equities, notably versus commodities, have also been associated with USD strength over the last 20 years

5. Similarly in the current cycle, the risk positive impact of lower energy prices will result in the JPY and EUR (and CHF) acting as ongoing financing vehicles, also consistent with a positive US equities – USD correlation.