British pound (GBP) forecasted higher against commodity + high-beta currencies (CAD, AUD, NZD, NOK)

The prospect of a UK rate hike was brought forward in November as the Bank of England was forced to acknowledge the UK recovery was progressing at a rate they had not expected.

This leaves open the potential for gains in the British pound with the commodity currency complex and other high-beta currencies offering the best potential gains.

This sector includes the Canadian, New Zealand, Australian dollars as well a the high-yielding Scandinavian currencies including the Norwegian Krone.

Forecasting GBP higher vs the Canadian dollar and Norwegian Krone

Analyst Dieter Merz at MIG Bank says he favours long Sterling positions "especially against commodity currencies. Indeed, GBP/CAD, one of our old favourites, continues to offer attractive short-term and longer-term upside potential: the multi-year consolidation between 1.5249 and 1.6474 implies a minimum target at 1.7700."

According to Merz, GBP/NOK is another attractive technical configuration, as it has just broken its resistance at 9.8248 (01/07/2010 high), breaking out of a multi-year base formation.

"The implied target at 11.1478 calls for a test of the key resistance at 10.7730 (23/06/2009) at the minimum," says Merz.

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The British pound should also appreciate against the Japanese yen, as the Bank of Japan is conducting a massive quantitative easing and is nowhere near withdrawing its stimulus.

"However, the key resistance at 163.09 (07/08/2009 high) and the elevated short JPY positions make us cautious in the short-term. Looking at GBP/USD, the resistance area between 1.6260 (01/10/2013 high) and 1.6381 (02/01/2013 high) is expected to cap GBP upside potential," says the MIG Bank analyst.

Rate hike expectations are supportive for GBP

The picture presented in the BoE's inflation report is of a recovery taking hold, associated with waning inflation pressures.

Usually, under such conditions, the market would discount that the BoE can hold rates low for longer, pushing down the value of the British pound.

"However, the market is focusing on the timing of the first rate hike, which, under the BoE's forward guidance, could occur sooner than previously suggested by the BoE," says Merz.

As a result, investors have pushed the value of Sterling higher and, given the current neutral IMM positions, a further appreciation of the British pound is likely.

"However, we would be more cautious in the longer term, as the recent upbeat forecasts also suggest a higher risk for disappointing market expectations," says Merz.