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The Pound can outperform the Euro but not the Dollar, according to Lloyds Bank.
Pound sterling enters the final stretch of July having ridden the relief of a sanguine leadership coup and a new Prime Minister who hasn't yet done anything radical enough to upset markets.
Looking ahead, Lloyds Bank reckons the pound can extend the rally and realise further gains against the euro, helped by the UK's still-high interest rates, although gains against the dollar will be harder to sustain.
"The pound is effectively trapped between fear and greed. That means GBP moves will continue to be determined by changes in relative fundamentals and interest rates," explains Lloyds Bank's FX strategist Nick Kennedy.
He adds that "political sensitivities might generate some temporary chop but we'd assume yields will remain more sensitive and, in that sense, can be stabilising for the currency."
Greed = GBP Upside vs EUR
On that metric, the strategist looks for more room for some sterling outperformance versus the EUR, as is typical of a supportive global backdrop in which yields help pro-risk currency pairs such as GBP/EUR.
However, GBP's advance won't be "enough to clear the large post-Brexit support shelf down at EUR/GBP 0.8200."
That 0.8200 shelf equates to a peak at 1.2195 on the pound-to-euro rate. (See how that forecast tallies against the consensus forecast held by the majority of investment banks).
Fear = GBP Struggles vs USD
If the euro side of the ledger offers the path of least resistance, the dollar side is where the bank suspects the path will prove more difficult.
"It is harder to see sustained gains versus the US dollar. US growth is faster and the Fed is likely to become more hawkish as underlying inflation stickiness there proves harder to shift against a backdrop of hot demand," says Kennedy.
He explains that for GBP/USD to advance back to this year's highs (north of GBP/USD 1.3600), credible macroeconomic policy steps that address the root causes of the UK's malaise and a calmer external environment are needed.
"We suspect we're in for more range trade, propped up around the 1.3200 line," says Kennedy.
The forecast therefore hands Sterling watchers two numbers for the months ahead: 1.3200 as the floor the pound-to-dollar range is expected to rest on, and a pound-to-euro ceiling near 1.22 that only a genuine improvement in the UK's fundamentals would unlock.
Whether the new government's autumn fiscal plans qualify as the "credible macro policy steps" Lloyds demands is now the question on which the range either holds or breaks.
