The clear majority of those analysts we follow here at Pound Sterling Live are bullish on the pound to euro exchange rate over the course of the next year. Yesterday we added to this view with Bank of America Merrill Lynch giving their forecast on the pair.
Today we report on the view held at investment bank Nomura; and the forecast offered is certainly the most bullish of the lot.
Commenting on their pro-sterling forecast, Nomura analyst Jens Nordvig says the reason for this bullish assessment lies largely with the fact that markets have underestimated the potential outperformance of the UK economy:
"As the market misjudges future GDP growth by anchoring too heavily on prior observations, we believe there will be opportunity based on misaligned expectations. We believe that these opportunities will likely manifest themselves in the forms of both upside and downside surprises.
"Opportunities for upside surprise, we believe exist in the United States and United Kingdom. On the other hand, we believe that the market is overestimating the strength of the recovery in the eurozone.
"The UK economy is breaking away from its recent past and the US economy may eventually do the same. We will trade the cyclically strengthening economies from the long side, likely for the next several quarters."
The result of this view can be found in bellows G10 exchange rate forecast table:
Tapering = US dollar gains? Think again!
Another striking view held by Nordvig is that tapering at the US Federal Reserve will not necessarily result in a strengthening US dollar; contrary to what many would believe:
"Tapering and higher US yields will not necessarily generate broad-based USD gains in short-order.
"However, when growth breaks to 3%, and short rates start to drift higher, the dollar is likely to move. We are trying to be patient, and not jump on to this trade too early. Still, the next big dollar trade is likely to be a long one, but it may only materialise later in 2014."
For now though, the relationship between the prospect of tapering and USD strength remains.
Cable traded close to the 1.60 level for most of the morning yesterday, but then siphoned higher through the afternoon session as Janet Yellen, the Fed Chair-Designate testified before the Senate Banking Committee.
"In no uncertain terms she underlined her commitment to continuing to provide support to the economy (i.e. providing QE) but also re-affirmed that any decision to taper the pace of asset purchases was data dependent – this was swiftly followed by Yellen affirming that the broader measures of unemployment were a lot higher than the current rate of 7.3%. There were other dovish comments and the USD fell across the board," points out a note on the matter from UKForex.
It is worth noting that Nomura's forecasts for the pound dollar had expected higher levels in GBP/USD for the current time. It does however acknowledge the GBP/USD will decline through next year, pretty much in line with consensus.
