The UK pound: Further recovery in store

- GBP: "We expect GBP to strengthen on a TWI basis into year-end. Our year-end target for EUR/GBP is 0.80 (our USDGBP forecast are under review)."
- Country-specific factors: "Key bullish factors include cheap valuation, favourable M&A and central bank flows, recovery in the financial sector, and a clear fiscal consolidation plan (and stable CDS spreads). The deteriorating housing market is likely to be the main negative influence over coming months."
- Global USD direction: "A dovish Fed along with below-potential growth in the US (but no double-dip recession) should facilitate USD weakening into Q4."
- Global risk factors: "After a period of elevated risk aversion, we expect the risk environment to shift to neutral for the next 3-6 months."
• "We expect the UK economy to grow at a slow pace in 2010 and 2011, at 1.7% and 1.9% respectively, following the announced budgetary spending cuts (this forecast is close to consensus)"
• "CPI inflation has been persistently high over the last few months – far higher than the Bank of England (BoE)’s 2% target rate. However, it has started to moderate. We expect inflation to remain high for the rest of this year and not to hit its target rate until 2012. The rise in the VAT rate in January 2011 should provide further upward pressure to consumer prices."
• "Nomura’s economics team forecasts the BoE to hike rates by 25bp in February 2011 to 0.75% and again in May 2011."

Nomura Strategic Currency Views 20100914

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