Sterling is set to make solid gains on the euro in the coming year as markets fully price in the divergent monetary policy paths the Bank of England and the European Central Bank are following, a Reuters poll found. The BoE is widely expected to be the first major central bank to begin hiking interest rates - although not until next year - whereas most economists say the ECB will cut its key interest rates on Thursday.
"The divergence between the two is just going to be ever more extreme," said Geoffrey Yu at UBS. "There is a big reluctance to sell sterling - the UK economy is doing relatively okay." According to this week's poll one euro will be worth 81.0 pence in a month, 79.8p in six months and just 78.8p in a year.
The common currency, trading around 81.3p earlier on Wednesday, has fallen around 5 percent in the past year and those medians suggest a stronger pound than the May poll did. Sources told Reuters last month the ECB was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.
After euro zone inflation fell unexpectedly in May, and business growth slowed, the case for ECB easing was pretty much confirmed. In contrast, minutes from the May BoE Monetary Policy Committee meeting highlighted growing differences about when to start reining in the recovery. A raft of upbeat data has increased expectations a hike may come sooner rather than later.
Speculators increased their bets in favour of sterling, the latest data from the Commodity Futures Trading Commission showed, as some policymakers voice their preference for raising rates. Britain's pound will, however, lose a little ground against the dollar, although not as much as previously thought, according to the poll. In a month you will be able to get $1.68 for a pound, about what it was changing hands for on Wednesday, then $1.67 in six months and $1.65 in 12. Those 6- and 12-month forecasts are stronger than in the poll one month ago.
Sterling has gained around 1 percent on the dollar this year and hit a 5-1/2 year high on a trade-weighted basis last month after signs some MPC members were leaning toward voting for a rate rise. That somewhat downbeat consensus comes despite business surveys suggesting the British economy is booming and employment picking up. But the US economy, the world's largest, is also faring well, although its central bank is still supporting the recovery with $45 billion of asset purchases monthly. The BoE drew a line under its quantitative easing programme in 2012.
About half of the 44 common contributors upgraded their forecasts for sterling 3, 6, and 12 months hence. The others were split between leaving forecasts steady and lowering them. The highest forecast for the 12-month horizon was $1.82, way above the $1.76 in last month's poll.
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