EUR/GBP Monthly Fundamental Forecast May 2012

Outlook and Recommendation

The EUR/GBP  ended the month on a high now, trading at 0.8142. After having traded within a range for over two-months the British pound (GBP) rallied significantly at the end of April. A less dovish BoE was the catalyst for the rally; however, the UK’s Triple-A status, its favorable position as an inter-European diversification play (note EURGBP has dropped to a 22 month low) and more favorable investor sentiment have supported the currency and are likely to continue to do so. We consider ourselves GBP bulls, looking for GBPUSD to close the year at 1.63 and EURGBP at 0.77

The dichotomy between economic fundamentals and foreign exchange dynamics in the UK intensified in recent weeks, as sterling (GBP) extended a two-week surge even after it was revealed that the economy experienced a technical recession in the October March period. According to the advance estimate, GDP contracted 0.2% q/q in the first quarter, following the 0.3% loss in the final quarter of 2011. The expansion in services output came in well below our  expectation, at 0.1% q/q, while the decline in the construction sector (-0.3%) was relatively more mild. Furthermore, the deterioration in the April PMI surveys – although they remain above the neutral 50-mark – does not bode well for the prospect of a marked rebound in growth in the second quarter. As a result of the disappointing early-year performance, we have revised lower our growth projection for 2012 to 0.5% from 0.9%.

Europe is back on global investors’ radar screens: Spain is the focus. Spain’s sovereign credit rating suffered another downgrade action by Standard & Poor’s to “BBB+” in late April. All rating agencies assign a “negative outlook” to Spain at a time when the country’s unemployment rate is approaching 25%. The euro (EUR) is remarkably stable against the USD, yet it shows a divergent trading pattern versus the British pound (GBP) and the Japanese yen (JPY). While EURUSD has been range trading so far this year, the GBP has shown value appreciation versus both the USD and the EUR on the back of asset diversification shifts in favour of non-euro European currencies, its Triple-A rating and improving investor sentiment. Additionally, the GBP received a boost from the Swiss authorities’ firm commitment to fight the appreciation of the Swiss franc (CHF) and defend the EURCHF1.20 ceiling.  Portugal and increasingly Spain continue to attract the attention of sovereign debt investors. Credit default swap (CDS) metrics continue to portray a highly distressed valuation in Portugal. This is all happening amidst election uncertainties in France, a critical piece in the European debt puzzle

Central Bank Name: Bank of England

Date of next meeting or last meeting: May 10

Current Rate: 0.50 % (- 0.50)

Statement highlights of last meeting: The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%.  The Committee also voted to continue with its program me of asset purchases totaling £325 billion financed by the issuance of central bank reserves. The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009.  A program of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009.  The previous change in the size of that program was an increase of £50 billion to a total of £325 billion on 9 February 2012.

 

Economic events for the month of May affecting EUR,CHF, GBP and USD