British Pound Sterling: Currency set to Outperform EUR in 2012 suggest BarCap, but safe-haven status not guaranteed

Last Updated on Wednesday, 08 February 2012 12:32 Written by Sam Coventry Wednesday, 08 February 2012 12:30

Three factors matter for EUR/GBP: the risk from Greece; the UK’s relative economic performance; and valuation.

Looking at today's spot exchange rates, British Pound Sterling (GBP) in Euro (EUR): GBP/EUR is 0.17% lower at 1.1966. British Pound Sterling (GBP) in US Dollar (USD): GBP/USD is 0.07% lower at 1.5885. British Pound Sterling (GBP) in Canadian Dollar (CAD): GBP/CAD is 0.01% higher at 1.5804.

Barclays Capital have today forecasted the British pound to maintain relative strength against the euro in 2012. As mentioned above, Greece will likely be GBP supportive.

---

Advertisement - Article Continues Below

---

The 20 March is a hard deadline for Greece.

Unless it receives a bailout from the EU/IMF by then, it will not be able to finance the EUR14.5bn government bond that is due and will default. Financing is available, but first Greece needs to agree to measures that will reduce its debt-to-GDP ratio to 120%.

"Resolutions on the PSI, as well as the Greek government coalition agreeing to the troika’s terms of the bailout, are key elements of this. At the time of writing, both remain uncertain," say Barclays Capital.

Uncertainty increases the appeal of safe-haven currencies.

"Within Europe, GBP is the preferred safe haven largely due to its weak relationship with euro area risk and its relatively high liquidity. GBP has also benefited from the government’s fiscal consolidation agenda and Bank of England purchases which have helped keep gilt yields low and supported the UK’s safe-haven appeal. Should euro area nerves increase as the March deadline looms, EURGBP is likely to sell off," say BarCap.

That said, the British Pound will not be able to rely on safe-haven status in the longer term.

"We expect GBP’s safe-haven support to reverse. Indeed, there is some evidence that the UK is already losing some of its safe haven gleam as gilt holdings by non-UK residents fell sizeably for the first time in December," say BarCap.

Without more data, it is impossible to know whether this outflow was a one-off, was related to reduced demand for safe havens (the ECB announced the 3y LTRO in the same month) or because the market viewed the UK as being too close to Europe.

Analysts say they expect the second interpretation to win out. However, even if the third scenario proves to be true, EUR/GBP is likely to receive some support as the market eschews all European currencies including GBP. "In our opinion, this will cushion the downside for EUR/GBP, not prevent it," says the investment bank.

Analysts expect EUR/GBP to depreciate in the medium term because of relative monetary policy.

BarCap say:

"As discussed above, the UK economy is weak, and further loosening is widely expected.

"However, the outlook for the euro area is worse, and our economists expect substantial loosening from the ECB, with a second LTRO announced for February and a 50bp cut to the refi rate forecast for March.

"Indeed, outright QE cannot be ruled out at this stage. This would compress the interest rate differential between the UK and euro area further, driving EUR/GBP towards 0.80 over the next year."