12 May 2015
UK rate hike scenario not priced in yet, EUR/GBP set to move lower – JP Morgan
FXStreet (Barcelona) - Jan Loeys of JP Morgan, believes that UK will have enough growth, inflation and wages momentum to help BoE to hike in Q1 2016, which might push EUR/GBP lower to 0.70 levels.
Key Quotes
“We had been long EUR/GBP and will retain it on view that a further sell-off in Bunds could deliver small gains this month. But over the balance of 2015 sterling should outperform the euro and range trade versus USD, despite the cyclical cross-currents created by a Tory majority and the political risks that could re-emerge in 2016.”
“Growth should be stronger in 2015 due to policy continuity, as tax hikes were much more likely if other parties had entered government. Growth in 2016 might be weaker than we previously assumed, however, because of larger spending cuts. Political risks will also rise in 2016 since tensions between the Tories and SNP (now the third largest party in Westminster) may revive the Scottish referendum. An EU referendum in 2017 seems certain now, and might even be pulled forward to 2016.”
“Still, there should be enough momentum in growth, wages and inflation to justify a first BoE hike in Q1 2016, with a total of 50bp that year and 75bp in 2017. That scenario isn’t priced, which is why the forecast shows EUR/GBP lower through Q1 2016 (0.70 target).”
Key Quotes
“We had been long EUR/GBP and will retain it on view that a further sell-off in Bunds could deliver small gains this month. But over the balance of 2015 sterling should outperform the euro and range trade versus USD, despite the cyclical cross-currents created by a Tory majority and the political risks that could re-emerge in 2016.”
“Growth should be stronger in 2015 due to policy continuity, as tax hikes were much more likely if other parties had entered government. Growth in 2016 might be weaker than we previously assumed, however, because of larger spending cuts. Political risks will also rise in 2016 since tensions between the Tories and SNP (now the third largest party in Westminster) may revive the Scottish referendum. An EU referendum in 2017 seems certain now, and might even be pulled forward to 2016.”
“Still, there should be enough momentum in growth, wages and inflation to justify a first BoE hike in Q1 2016, with a total of 50bp that year and 75bp in 2017. That scenario isn’t priced, which is why the forecast shows EUR/GBP lower through Q1 2016 (0.70 target).”