GBP has had a rollercoaster ride both against the USD and the EUR. On balance, it has fared better than the EUR vs. USD. News that Fitch ratings put the UK’s AAA ratings on negative watch had little impact although it may yet restrain GBP. If anything the news will likely help UK Chancellor Osborne formulate a relatively austere budget next Wednesday. Unlike the beleaguered JPY, GBP has not suffered from a widening in the yield differential with the US.
In fact 2-year UK Gilt yields have echoed the rise in US 2-year bond yields over recent days. This suggests that GBP ought to face less downward pressure compared to other currencies. Although I continue to see further GBP strength against the EUR over the medium term, the near prospects look volatile. Instead, I suggest playing a GBP positive view via the AUD.
It is worth commenting, albeit belatedly, on the outlook for the NOK following the surprise decision by Norway’s central bank, Norges Bank, which cut its policy rate by 25bps on Wednesday. Does it significantly change the outlook for the NOK? I believe it doesn’t and the recent drop in the NOK will provide a good opportunity to reinstate long positions.
Although the central bank may ease policy once again over coming months this will not undermine the NOK given that the influence of interest rate differentials on the currency is limited. Moreover, lower interest rates threaten to push already high property prices even higher suggesting that the Norges Bank may have limited room to cut rates further. Elevated oil prices continue to provide solid support for the currency and unless oil prices correct lower, the NOK will remain well supported versus EUR, with a drop to around 7.45 on the cards.