Chris Walker, Currency Strategist at UBS, on GBP/USD and EUR/GBP

The Cable’s forecast for one month is, actually, 1.47 and one year forecast is 1.53.

With Mark Carney becoming the Bank of England Governor soon, what changes do you expect to see in the central bank’s monetary policy stance and inflation targeting?

Since Mark Carney joining the Bank of England at the end of June 2013, there is a lot of speculation that he will use quite a new radical regime. We do not think it is going to be a case just yet, we believe that he is still going to be sticking to “flexible inflation targeting”. He was quite clear in his testimony last week that that is the case. Nevertheless, it is still going to be easy policy for quite a long time. Hence, we do not think the BOE will tighten any time soon. Although, one of the tools, which the central bankers can probably change slightly is the period of which they look free to above targeting inflation rates. The policy makers used that quite frequently. Sir Mervyn King has constantly referred to looking through the temporary effect of energy prices and food prices increases and I think they are going to continue to do that. Thus, I do not see any tightening policy anytime soon; the central bank is going to keep its monetary policy relatively loose.

One point we have been making is we do not think that QE is just likely yet. We can argue that if inflation does start to creep up, then of course the prospects of further QE are diminished, but we still think the policy is going to remain fairly easy.

What drivers are going to have a substantial impact on the Pound’s performance in the short and long run?

If we go back to what we have seen in January, in particular, and the start of February, it has been a re-pricing of risk across most markets. One of the main reasons why the Sterling showed such a strong performance at the end of the year was because it was receiving safe haven bid through the gilts market. We think there has been a clear reduction in that, and while that has not shown up in the hard data yet and if anything opposite has happened, it is clear that it quickly lost its status as safe haven.

The other part is re-pricing economic risks outside of the U.K.’s economy. Even though, some leading indicators are starting to correct, we saw that in the PMI data last week, it is still not the brightest picture and that is what we see in the U.S., for example.

Whereas, EUR/GBP is heading down to 87 in the next three months and grinding lower to a one-year forecast of 83.

It is a function of these two things, and we do not think that these drivers are going to change substantially. One area where we think we could see a bit of a correction is EUR/GBP. We think that it has probably come a little bit too far and we can see a slight correction to the downside in EUR/GBP. However, we think the Cable continues to grind lower and it is a combination of those two factors, which means that volume is probably going to stay quite depressed as well.

What is your forecast for GBP/USD and EUR/GBP for the end of February and for the end of the first quarter?

The Cable’s forecast for one month is, actually, 1.47 and one year forecast is 1.53. Whereas, EUR/GBP is heading down to 87 in the next three months and grinding lower to a one-year forecast of 83. While we do see the pair roughly flat for the next month or so, as we think it will gradually move lower, because, obviously, material improvement in Eurozone export and economy prospects is itself good for the U.K. economy given the strong trade link.