SWIP outlines expectations for sterling

On the back of sterling briefly falling through the psychological $2 level today, Roddy Macpherson, Investment Director, Global Strategy at Scottish Widows Investment Partnership comments on the future direction of the Dollar-Sterling exchange rate:

"Sterling briefly fell through the psychological $2 level today and we forecast sterling will fall somewhat over the next 12-months. However, as $1.67 reportedly represents the exchange rate at which a Starbucks' coffee in London and New York effectively costs the same, sterling looks set to remain well above this fair value level over the coming year.

"Charts of trade weighted sterling going back over the last 20 years shows sterling towards the top of its range whilst the US dollar is languishing close to its lowest levels over the last 30 years. Surprisingly high inflation data in the UK has recently helped propel sterling higher as further interest rate hikes have been priced in for May and later this year, although the latter hike we feel is by no means certain.

"However, speculators are already positioned significantly in favour of sterling over the US dollar and have only been more heavily positioned on 5% of occasions over the last 10 years. In the short-term, risk appetite across major asset classes is looking high, and on recent occasions when appetite towards risky assets, including high yielding currencies, has waned, the US dollar has benefited relative to sterling. All together, we think a lot of good news is priced into sterling at current levels."