FXStreet (Barcelona) – According to Strategists at BofA-Merrill Lynch, policy divergence will boost strength in the pound ahead, and see EUR/GBP and GBP/SEK as better opportunities to trade the expected GBP strength.
Key Quotes
“With election uncertainty out of the way, we expect the market to focus back on the UK economic outlook and GBP to depend on relative monetary policies. The decisive nature of the UK election outcome caught the markets (including ourselves) completely by surprise. In TWI terms, GBP rose to its highest levels since 2008, whilst GBP/USD hit its highest for the year.”
“Looking ahead, we expect divergence of monetary policies to drive the GBP, overriding medium-term concerns, such as the large current account deficit.”
“The signs for GBP remain positive. The evidence from our indicators and surveys suggest investors have breathed a collective sigh of relief on a clear election outcome. What comes out clearly from our positioning indicators is that the strong rally in GBP has been an unwinding of GBP shorts. Positioning is therefore not saturated and should not be a constraint to further upside despite the fact that the GBP TWI has overshot levels implied by rate differentials.”
“However, our strongest conviction for further GBP strength is on the non-USD crosses, where the policy divergence framework is most robust.”
“We continue to look for a lower EUR/GBP, as the ECB reiterates its commitment for QE to run its course.”
“GBP/SEK also fits into this framework, as the Riksbank continues to increase its balance sheet in an effort to prevent SEK strengthening.”
“We see EUR/GBP at 0.67 and GBP/USD at 1.49 by end-2015. Risks include doubts over the Fed tightening cycle and possible verbal rhetoric by the Bank of England on recent GBP strength.”
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