Forward Guidance To Weigh On EUR, GBP‏

The gap in which forward guidance leaves monetary policy in the U.S. versus the U.K. and the euro area, we have pencilled in further downside in EUR and GBP versus USD. We expect the ECB and the Bank of England to lag substantially behind the Fed. It seems the USD rebound is here to stay.

We have kept our EUR/USD view largely unchanged, and have only rolled the forecast one month, reflecting our expectation for dollar strength towards year-end and in 2014 as the market increasingly prices the Fed exit. Risks are more symmetrical in the short term as sentiment appears to be fairly dollar bullish, leaving potential for spikes higher in EUR/USD on U.S. data disappointments, or a potential further reduction in euro-area excess liquidity. We are now targeting EUR/USD at 1.25 (previously 1.26).

The Bank of Japan's fundamental shift in monetary policy will continue to favour a weaker JPY and we have adjusted our 3M and 6M USD/JPY targets slightly higher to 103 (previously 101) and 106 (105), respectively, reflecting that the timing of the Fed scaling down its QE programme has moved closer.

We have incorporated more near-term GBP weakness. We look for the Bank of England to introduce more explicit forward guidance in August as a follow-up to the hints in the July statement. We expect the likely announcement of a more aggressive approach to monetary policy - either via a time- or state-contingent rule - to anchor short GBP rates and weigh on sterling on a 1-3M horizon. However, if nothing is delivered GBP will edge higher as some 'Carney risk' has already been priced in.

In the Scandi sphere, we have left our SEK forecasts unchanged but following the dovish Norges Bank's late June, we have pencilled in a higher level for EUR/NOK. We are still looking for the cross to move lower on a 3-12M horizon, as we are reluctant to call a cut from Norges Bank due to the improving economic outlook we see materialising in H2. In the near term, the risk of a cut may continue to weigh on NOK, but we expect EUR/NOK to move gradually lower to hit 7.50 next summer as no cut is in fact delivered.

Emerging-markets (EM) currencies have seen some relief/stabilisation lately with a few exceptions. Particularly TRY is under pressure and the Turkish central bank continues to prop up the lira by direct FX interventions. Overall, we remain fairly cautious regarding EM and our main worry is China. We have changed our EM forecast in a more negative direction for selected currencies, not least TRY and PLN. On TRY we see risk for further weakness given the deteriorating macro outlook, continued domestic political tensions and the negative technical picture. Among the CEE we have made the biggest change for PLN: we believe that the Polish central bank will be forced to cut interest rates further despite the NBP opting for a neutral stance, in order to fight the deflationary pressures.

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