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Sterling Bounces Back

Sterling rallied hard last week, following a clear hawkish shift by the Bank of England on Thursday.  GBPUSD hit a post Brexit high above 1.36, and GBPEUR pushed into the mid-teens, dampening the talk of GBPEUR parity that had begun to creep back into market discourse in recent weeks. GBP’s recovery was something we did expect - we set a 12-month target for GBPUSD of 1.40 back in May - and now that this level is in sight (the market-implied probability of us hitting 1.40 in 2017 is now 50.1%!), we examine the factors which we expect will determine sterling’s value in the coming months.



Monetary Policy - Bullish


Thursday’s Monetary Policy Committee (MPC) meeting took markets by surprise, with the Bank of England stating that it would be appropriate to tighten policy “over the coming months”.  The interest rate futures markets, which had not been pricing in a UK rate hike...

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Will the hype around the ECB ever amount to tighter policy?

 In last Monday’s report, we debated whether the recent bull run in the euro can continue. At the ECB meeting on Thursday, Draghi justified our belief that it may struggle with the committee set to maintain a very cautious approach to tightening policy.


Most commentators reported Draghi’s stance as being slightly less hawkish than expected. He announced that the market will need to wait until at least October for more details on the tapering of the QE program (which currently stands at EUR 60 billion per month). The consensus (which hasn’t really changed) is for asset purchases to be scaled back gradually throughout 2018 – most likely halved in H1 and reduced to zero by the end of H2.


The more dovish aspect of Draghi’s communique was his strong emphasis on the point that whatever the ECB decides on QE in October / December, the policy rate will remain low “well past”...

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EUR: Can the Bull Run Continue?

There are only two exogenous factors...that can realistically explain the resilience of (Europe’s) recovery: the collapse in oil prices in 2014-15 and our monetary policy.


Mario Draghi, ECB President

April 2017



When we made the decision to revise our EUR forecasts back in June, it was based largely on two factors.  Firstly, the political risks facing the Eurozone had declined following the victory of Emmanuel Macron in France, and secondly, the region’s economy had begun to outperform market expectations.  We reversed our bearish view of the single currency and set a 1.20 target for EURUSD (at the time, EURUSD was trading below 1.12, firmly ensconced in 1.10-1.15 trading range). 


We have now reached our 1.20 target, so naturally we must consider whether this EUR rally still has legs.  In other words, do the two factors mentioned above justify a stronger currency than we initially thought, or, might there be other factors coming into play...

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