The market remains fixated by the euro crisis, ensuring that GBP largely takes its cue from EUR-USD. We examine five potential catalysts for this link to break. While there is much fiscal pain to come, there are not yet grounds for GBP to move independently of EUR-USD. As a result, we believe EUR-GBP will push higher in 2012 alongside our profile for EUR-USD. The main risk to this link is slippage on UK fiscal policy.
*USD lower for longer
Recent game-changing FOMC commentary will result in a weaker USD. It also serves as a reminder that US issues can get traction in FX despite the current euro crisis fixation.
*Antipodean tipping point
Although benefiting from the “risk on” mood, AUD and NZD face downside risks based on valuations, balance of payments dynamics, poor risk/reward compared to other G10 FX, and a fading role as a China proxy.
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Global Research