For reference, the pound dollar exchange rate is trading at 1.5985 and the pound to euro exchange rate is trading at 1.1933.
Sterling continues to strengthen. Against a trade weighted basket of currencies the pound is now trading at a five year high.
However, don't expect such elevated levels against the US dollar to last.
"We expect GBP/USD to continue to bump around 1.60 this year, before slowly falling into the low 1.50s over 2014," says a note from RBS Group Economics.
Regarding the pound to euro exchange rate outlook, RBS say they see the GBP moving higher:
(Please Note: All quotes here are derived from the wholesale spot markets. Your bank will charge a spread at their own discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please find out more here.)
"The euro has strengthened against sterling. However, with unexpectedly weak inflation raising the spectre of deflation in the Eurozone, this strengthening has been rapidly reversed as the ECB cut interest rates.
"As a result, GBP/EUR pushed back above 1.20. We think sterling will move higher against the euro over coming months with a worrying slowdown in inflation just the latest problem to beset the currency union."
UPDATE: Bank of America see GBP/EUR at 1.25 at end-2014. See entry at 15:05.
Pound exchange rate forecasts from RBS, Click the below image to enlarge:
Pound sterling starting to recover lost ground
The GBP basket may be trading at a 5 year higher, however we are still some 12% below pre-crisis rates.
For exporters this represents a pretty big dent in the competitiveness boost that UK exporters gained from the initial 25% depreciation.
"This will make rebalancing the economy towards trade more difficult. Indeed a weaker exchange rate looked like a natural remedy to last year’s current account deficit - the largest since 1989," say RBS.
Sterling’s appreciation has been supported by an improvement in UK economic conditions over 2013, as the recovery at last starts to move through the gears.
UK GDP grew by 0.8%q/q in Q3 – the fastest pace since 2010. The labour market also continues to improve, with the number of full-time jobs up by more than 100k over the three months to August.
BoE MPC member Spencer Dale argued that in this environment, as attention naturally shifts from 'how long rates will be on hold' to 'how quickly will they rise', the current framework for forward guidance has its limitations.
"For now, we’re leaving our forecast as it is. But if we get more upside surprises, or the BoE reveals new thinking in its Inflation Report next week, we’ll have to change it. It’s worth noting that market forward rates imply that Bank Rate will start to rise in Q2 2015," say RBS.
