The September edition of Lloyds Bank Commercial Banking's International Financial Outlook has been published.
Analysts at the bank have advised they have pushed out their expectations for the first US rate rise to December and have pared back the policy rate forecast for end-2016 to 1.00% from 1.25%.
UK policy rate projections have been left unchanged, with the first hike in February 2016, well before market expectations for the second half of next year.
The risk of further policy stimulus by the ECB has however increased.
Lloyds see UK 10-yr government bond yields edging above 2% by year end, rising further to 2.6% by end-2016.
Concerning the impact of these interest rate movements on exchange rates Lloyds say:
- We still see downside risks for sterling in the medium term, led by concerns about the current account deficit, potential EU referendum uncertainty and more acute fiscal austerity.
- In contrast, we believe the euro is structurally undervalued, although further ECB QE is a downside risk.
- Our GBP/USD forecast has been raised to 1.56 from 1.54 for end-2015 and left unchanged at 1.45 for end-2016. Our GBP/EUR target for end-2015 has been raised to 1.46 from 1.44 and is unchanged at 1.24 for end-2016.