Currency Forecast - Currency Roundup: EUR And GBP Rally Running Out Of Steam, RUB And TRY To Underperform - 24 JULY 2017

Aside from the Turkish lira and the Romanian leu, European currencies have generally performed well on a year-to-date basis. Both the British pound and the euro have made significant gains against the US dollar, although we believe the respective rallies are running out of steam. The Polish zloty and Czech koruna have performed well against the euro, and we believe fundamentals are in favour of further long-term gains. Among emerging EU currencies we are less positive towards the Hungarian forint and Romanian leu, due largely to dovish monetary policy in the former and political instability in the latter. The Russian rouble is among the worst performing currencies and we maintain our view that the currency's multi-year appreciatory trend is over, while the Turkish lira will face rising headwinds over the coming months.

UK: The British pound (GBP) has strengthened by 1.5% over the past month against USD and is currently testing resistance around USD1.30/GBP, buoyed by appreciatory pressures largely stemming from the Bank of England's (BOE) somewhat hawkish shift in recent weeks. Although a break above this level would set up a move towards USD1.35/GBP in the first instance, we expect cable to remain broadly range bound in the months ahead. Over this time horizon, further GBP strength will face headwinds on account of slowing growth and heightened uncertainty stemming from the ongoing Brexit negotiations. With a lack of clarity over the government's negotiating position, and little visibility on what the UK's future economic relationship with the EU will look like, upside will be limited and periods of excess volatility are likely as the bilateral talks ebb and flow.

Eurozone: While the euro (EUR) has been one of the best performing currencies on a year-to-date (YTD), strengthening by 8.7% in spot terms, we remain neutral from a short-term perspective. The euro is currently testing resistance at USD1.15/EUR and a break above would be a clear bullish signal. However, we continue to believe that the euro rally lacks fundamental support and we are happy to maintain our call for relative EUR underperformance, albeit slightly less than previously forecast. The euro has benefitted in recent weeks from the rise in German real bond yields, helped by a strengthening eurozone economy and a somewhat hawkish shift in the European Central Bank (ECB)'s forward guidance in early June. In absolute terms however, real rate differentials, as measured the spread of German over US 10-year inflation-linked bond yields, continue to favour the US and suggest to us that the EUR rally will not be sustained.

Solid H117 For The Majors
Europe - YTD AND 1-Month Currency Performance
Source: Bloomberg, BMI

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