He says: “We believe that the British pound is overvalued versus the euro, as the job market in the UK is showing signs of deterioration due to a slowdown in consumption. Additionally, the BoE is expected to adopt more dovish monetary policy compared with the Fed, aligning more closely with the ECB.”
Adjriou adds: “Our view is that the market is currently too hawkish in pricing in the bank's monetary policy, leading to a divergence in rates between market expectations and our own views.
“This discrepancy, should it materialise, is likely to have a negative impact on the currency. Furthermore, the upcoming UK elections are expected to put further pressure on the pound. Considering all these factors, we maintain a cautious outlook.”
Rate cuts on the cards?
In contrast, Diggle believes the economic trajectories of the UK and Eurozone are relatively aligned, creating a scenario “where the economic environment justifies rate cuts”.
He also feels that the economic outlook in the UK is improving marginally from a year ago, while he expects the growth trajectory for the US economy to slow marginally, narrowing the gap between the respective countries’ growth rates and potentially between their interest rate outlooks.
IG Group chief market analyst Chris Beauchamp says: “In the short term, I suspect the modest cuts projected [25 basis points in June and August, and perhaps another in November] are now broadly priced in.
“UK inflation has not been too sticky so far this year, but if it starts to show a similar stubbornness to US inflation, then we might see the BoE walk back some of its apparent commitment to dovishness.”
He adds: “As is so often the case, however, the bigger determinant will be the Fed. A small rise in the pricing for a hike shows growing nervousness in the market about the direction of US inflation. If no progress on US prices has been made by the summer, then the outlook for sterling seems set to deteriorate again.”
David Thorpe is investment editor at FT Adviser
