The dollar and pound sterling should outperform their G10 and Asian rivals over coming months but the pound to dollar rate itself should remain caught in a battle of attrition argue Standard Chartered.
The British pound is advancing against the dollar once more with a break of the 1.55 barrier now possible.
Despite the near-term strength we are told that GBP/USD strength will ultimately be capped.
Standard Chartered, in a monthly foreign exchange forecast note have told clients they continue to expect the USD to strengthen, even if it faces short-term challenges from the Fed’s rate hike delay, as we believe the broader case for a stronger USD remains intact.
The call comes at a time when both the US dollar and pound sterling have been under sustained pressure owing to markets pushing back their forecasts for the first interest rate rise in years at the US Federal Reserve and Bank of England.
Despite interest rate forecasts moving against the GBP and USD of late, "monetary policy divergence remains critical to our view; higher US short-term rates, as the Fed hikes while most other central banks, both in Developed Markets (DM) and Emerging Markets (EM), maintain or add to existing stimulus," note Standard Chartered.
Furthermore, net-long speculator USD positioning, relative to G10 currencies, has eased considerably over the past few months.
"While we acknowledge an increasingly benign US rate outlook is a risk to our USD view, on balance we believe the likely policy divergence between US rates and elsewhere will be significant enough to send the USD on its next leg higher," say Standard Chartered.
The London-based, Asia-focussed bank expects further USD and GBP strength against other major and Asia ex-Japan currencies over the next 3-6 months.
Looking at the pound to dollar exchange rate in particular, Standard Chartered say they are neutral on GBP/USD.
This is an understandable call - how would two currencies that are forecast to outperform the market perform against each other?
The strength in both is predicted to ultimately end in a stalemate for a GBP and USD head-to-head.
But, expect the British pound to outperform G10 and Asia ex-Japan currencies.
"UK economic data continues to improve, particularly with respect to consumption, wage growth and core inflation, while foreign inflows remains supportive," say Standard Chartered.
Against this backdrop, it is believed that the BoE is likely to hike interest rates early next year, ahead of what markets currently expect.
Market pricing is pricing the pound exchange rate complex lower for a mid-2016 hike.
Related research from Standard Chartered sees the New Zealand and Australian dollar declining over coming months.