Currencies | Feb 04 2013
By Andrew Nelson
About the only currency that’s performed as poorly as the yen of late has been the British pound sterling (GBP), which has lost 2.5% against US dollar and 5.60% against euro since the beginning of the year. Moreover, Danske Bank sees even worse just around the corner, predicting a perfect storm is in the making for sterling.
Thus, the Danish bank expects to see a further significant depreciation of sterling, predicting a move above 95 in EUR/GBP is a real possibility sometime over the year ahead.
The reasons:
Firstly, the bank postulates that more stimulus is likely from the UK, with the government looking to boost the UK economy further in 2013 and the newly appointed Bank of England chief likely to be right behind the push. Prime Minister Cameron’s recent EU speech has also added to GBP uncertainty.
Next, there is growing speculation the UK might suffer a triple-dip recession, especially after GDP growth surprised to the downside in Q4, falling 0.3% quarter on quarter. Danske notes the UK purchasing managers' index (PMI) is also currently pointing to a very weak recovery in manufacturing.
And even were there a UK recovery on the back of an improving global recovery, the GBP would still be expected to face a number cyclical headwinds given its status as a counter-cyclical currency that normally depreciates in a positive global growth, notes the Danish bank.
Lastly, Danske points out that Since the ECB put the kybosh a new rate cut a few weeks back, European money market rates have pushed significantly higher relative to corresponding UK rates.
The bank concludes that the euro debt safe haven flows that supported sterling have now completely dried up and a big reversal of safe haven flows back into the eurozone is now under way, while an unwinding of speculative positions is also adding to the momentum of GBP depreciation.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
