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Why Citigroup are forecasting the British pound (GBP) to rise higher in 2014

By Gary Howes

We hear from Citigroup Inc. on why they are backing further British pound (GBP) gains over the course of 2014.

The British pound sterling (GBP) is forecasted to advance against a host of the worlds largest currencies over the course of 2014 by analysts at Citigroup.

The bank says it sees the GBP outperforming thanks to the UK's superior growth prospects in the year ahead.

"(In 2013) GBP outperformed as the upbeat U.K. economy prospects continued to support the pound. GBP Outlook - The strong economic growth and high housing price will likely support the pound in medium term. Technically, GBP/USD may rise to 1.6603, with support at 1.6261," say Citigroup.

(Note: All FX quotes are taken from the wholesale spot markets. Your bank will charge a spread on the rate at their discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering you up to 5% more currency. Please learn more here.)

UK economy set to outperform

While the shorter-term Citigroup technical forecast sees GBP/USD rising to 1.6261 the fundamental forecast is more bullish.

"British Prime Minister David Cameron said to carry out plans to support the economic recovery such as reducing debts, lowering income taxes, creating job growth through support to SMEs and so on. Citi analysts expect U.K. economic growth may reach 3.2%, the strongest among major countries, which may support the GBP. GBP/USD may gradually rise to 1.75 for the coming 6-12 months," say Citigroup.

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US dollar to also do well in 2014

Stepping into 2014, global central banks' monetary policies may have a large impact on FX market, especially the Federal Reserve have started to taper.

Citi analysts expect the bank to end QE in September, which may underpin the USD.

The Strong USD may exacerbate the JPY's weakness. The government of Japan will hike the consumption tax from 5% to 8% in April.

"The BOJ is expected to expand QE by 15 trillion yen after mid-2014 to offset the impacts from the tax hike on the economy, which may undermine the JPY in the medium term. Technically, USD/JPY may gradually rise to 108.95, with support at 103.74," say Citigroup.

For AUD, as RBA may keep the negative comments on the AUD and may not start raising rates until 2015. This will likely be AUD-negative.

The NZD, another commodity currency, may outperform. Since the NZ economic recovery accelerates, the RBNZ is expected to hike the interest rate from 2.5% to 2.75% in Q1 this year and probably to 3.75 by year-end.