British Pound Sterling: UBS remain cautious on the UK currency, set a significantly lower 12m GBP-USD forecast

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Published on Friday, 15 June 2012 09:25

Written by Will Peters

"These remarks support the view of our UK economist that further Gilt purchases are in the pipeline" - Gareth Berry at UBS.

One of the key discussions on global FX markets this morning is the announcement of a massive new loan facility that is due to be extended to the UK banks.

Of course, from a currency perspective, we ask what impact this will have on the pound sterling (Currency:GBP). PS. For more exchange rate forecasts please visit our IMT site, via this Facebook gateway path).



Looking at the spot rates we see the pound euro exchange rate is 0.08 pct down at 1.2306, the pound dollar exchange rate is 0.1 pct down at 1.5547, the pound Australian dollar exchange rate is 0.23 pct down at 1.5492.

Yesterday the UKs Finance Minister Osborne announced that the government and the BoE will jointly launch a new bank funding scheme with the specific aim of boosting bank lending to the real economy.

According to UBS the immediate impact of the loan facility will be negligible.

"Although this represents a significant expansion of the BoE’s policy toolkit, a similar scheme is already operated by the BoJ where cheap central bank money is channeled to Japanese commercial banks who pledge to on-lend the cash to “growth industries” in the real economy.

"We believe that the sterling impact will be minor as the pro-growth positives are counterbalanced by the currency-negativity associated with central bank balance sheet expansion."

Also announced yesterday by the Bank of England governor Mervyn King was that a separate tool known as the Extended Collateral Term Repo (ECTR) Facility - which was first unveiled in December - will now be activated for the first time.

"This is clearly an attempt to prepare for possible market stress arising from the Greek election over the weekend - the facility’s purpose is to provide sterling liquidity “in response to actual or prospective market-wide stress of an exceptional nature” and its activation alone should not in itself have any sterling impact," say UBS.

King has also hinted at further monetary easing which can be taken to be a sterling-negative event.

King noted that “the case for further monetary easing is growing” and he pointed specifically to economic weakness that has surfaced since the latest quarterly inflation report was published.

"These remarks support the view of our UK economist that further Gilt purchases are in the pipeline and could be announced at the August policy meeting. We remain cautious on sterling and keep our 12m Cable forecast of 1.44," say UBS.