Special Report: Barclays GBP forecast revised sharply downwards

Tom Tong05/Jul/2011Currency Updates

After months of taking a bullish stance towards the sterling, forecasting fast appreciation against the major currencies as the UK economy recovered, Barclays Capital has performed a complete volte-face, revising its view for the sterling against the euro and dollar in a far more bearish stance than before. See the graphs below:

GBPUSD
USDEUR

The reasons for this new analysis are threefold and as follows:

  • With extremely disappointing domestic growth and the likelihood of a vicious circle between falling confidence and consumption growth forming, cyclical prospects have shifted against the sterling. It’s this weak growth along with the Bank of England’s change of call that represents the biggest factors in Barclays’ revision.
  • While the risk premium on the GBP has not significantly risen, a combination of poor growth and high inflation does increase the risk of a loss of credibility in the UK’s fiscal and monetary policy.
  • Valuation is still in sterling’s favour but this may not lead to particularly quick appreciation. The exchange rate has remained low, but this is the case for the dollar too – although it has responded less so far, signifying that significant depreciation of GBP/USD is unlikely.

If you need any further clarification on the impact that this may have on your exposure then please don’t hesitate to call your Ebury Partners on 0845 519 1009.

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Written by Tom Tong

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