GBP: Uncertainties prevail, in both directions - UBS

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 15, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Córdoba) - The UBS analyst team changed their three-month GBP forecasts to reflect increased uncertainties weighing on sterling for the moment. UBS team, however, continues to expect a strong rebound of the pound over the 12-month horizon.

    Key Quotes

    “In our view, markets have adjusted to recent uncertainties to a large degree, which pushed sterling lower. With uncertainties around the Bank of England's rate hiking path persisting and the EU referendum date to be announced in the coming months, this negative sentiment is likely to stay with us in the near term. However, we expect the incoming labor market and inflation data to support our case for rate hikes in 2016 and therefore a stronger pound throughout the year.”

    “Our new three-month GBP/USD forecast is at 1.48 from 1.52 previously, while we keep the six- and 12-month forecasts of 1.55 and 1.58 unchanged. This translates into a new EUR/GBP forecast of 0.71 (from 0.69) in three months and 0.70 in six and 12 months, and a GBP/CHF forecast of 1.49 (from 1.53) in three months and 1.55 and 1.58 in six and 12 months.”

    “On the negative side of recent news flow has been a topping out and, to some extent, weakening of some UK economic indicators, which raised concerns of a stronger economic slowdown in the UK. Furthermore the upcoming EU referendum has started to get more attention and impacted the Bank of England rate hike probability strongly. A deal between the UK and the EU will most likely be reached at the European Council meeting on 18 February. With this, a referendum will either take place just before the summer holidays (potentially June) or just after (September or October). On the basis of this uncertainty, markets have started to see a lower probability of a Bank of England rate hike being delivered at either the May or August meeting; the most likely meeting for the first rate hike is now being priced in for November. In aggregate, this led to the recent fall of sterling and will likely keep its value subdued in the coming months.”

    “However, looking at other fundamental data, we believe markets have become too dovish in recent weeks. The labor market has continued to improve better than the Bank of England has expected, with the unemployment rate likely falling to a level they judge to be the long-term equilibrium. Furthermore, the level of the trade-weighted sterling exchange rate has fallen by 6.5% over the last six weeks, a factor that would improve the Bank of England's medium-term inflation projection at the February Inflation Report. Overall, we therefore believe that markets have become too pessimistic on sterling, and we expect a gradual strengthening throughout the year, with temporary bouts of volatility, especially around the EU referendum.”
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