The lower oil price and strong sterling have lowered the near-term inflation outlook and we now expect BoE to begin raising interest rates in February 2016.
We expect the BoE to increase interest rates at a relatively modest pace of around 75bp annually in the coming years, taking the Bank Rate to 1.25% by the end of 2016.
In the short term, we expect EUR/GBP to remain supported by low UK inflation: we expect EUR/GBP to trade relatively volatile and trendless in the coming months and we have kept our 1M and 3M forecast unchanged at 0.71 and 0.70 respectively, while GBP/USD is expected to drop to 1.49 in 3M. We have kept our 6M target for EUR/GBP unchanged at 0.69 and now think that EUR/GBP is more likely to bottom in Q1 16.
We think short GBP/USD via a 3M bearish risk reversal offers an attractive risk/reward for positioning for further USD appreciation.
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