British pound sterling: Currency faces increasing risks of underperformance vs USD, but stability against EUR is forecasted

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Published on Tuesday, 26 June 2012 09:53

Written by Will Peters

"However, foreign exchange is a relative game and it’s hence important to note that the situation in many other G10 economies has also deteriorated" - Paul Robson at RBS.

Global FX Latest: The pound sterling (Currency:GBP) continues to sit pretty on the global FX space. It would seem that markets have fully priced in a 50bn GBP balance sheet expansion at the Bank of England.

A glance at the spot rates shows the pound euro exchange rate is 0.34 pct up on a daily basis at 1.2500. (Latest pound euro forecasts published at our IMT site, free access issued via this Facebook entrance path).



The pound dollar exchange rate is 0.25 pct higher at 1.5612.

The pound to Australian dollar exchange rate is 0.05 pct lower at 1.5545.

Growing risks of British pound under-performance

The BoE and HM Treasury have announced a series of policies to ease credit conditions in the UK.

"Traditionally, such a backdrop has been a difficult one for GBP and hence we see increasing risks that GBP starts to under-perform in both a risk positive and risk negative environment," notes Paul Robson at RBS.

The RBS fair value model is suggesting GBP-USD in the low 1.50s and analysts say they expect EUR/GBP to remain relatively stable, anchored around 0.80.

Robson says:

"We believe that the risks have shifted in favour of an announcement of a further £50bn of asset purchases at the July MPC meeting.

"Such a loosening of monetary conditions has in the past tended to play negative for GBP, ceteris paribus. However, foreign exchange is a relative game and it’s hence important to note that the situation in many other G10 economies has also deteriorated.

"Until fairly recently, market interest rates had been moving in favour of GBP (trade weighted). To us, the focus looks set to remain on the timing and degree of monetary easing across the G10 from a currency perspective."