Sterling will cruise at current levels against the battered euro despite growing optimism about the British economy's ability to outperform a euro zone still gripped by the sovereign debt crisis, a Reuters poll found on Thursday. The pound will trade against the common currency roughly at Thursday's rate for the next year, with one euro buying 83 pence in one, three, six and 12 months' time, according to the poll of over 60 foreign exchange strategists taken this week.
The forecasts are little changed from a January poll that saw the euro worth 84 pence in one and three months, then dropping back to 83 pence. But forecasts were in a slightly wider range, with the rate in 12 months seen between 75 pence and 90 pence, highlighting market uncertainty about the outcome of the debt crisis and prospects for economic recovery in Britain.
One respondent said the multiple potential scenarios by which the debt crisis might be resolved was making forecasting exceptionally difficult. "There are some binary outcomes around Greece, there are potential binary outcomes around Portugal, so you can build a bullish or bearish story fairly easily," said Geoffrey Kendrick, head of European FX strategy at Nomura.
"For the UK, you have a binary link to Europe," meaning it is difficult to change view on sterling until more is known about how Europe will sort out the crisis. Fears that Greece could face a disorderly default if it does not quickly secure a debt restructuring deal with private creditors, or that Portugal might require a second bailout, continue to rattle investors and dent confidence.
The euro zone is expected to flounder in mild recession until the second half of this year, according to a Reuters poll, but even that assumes the region's debt crisis will not flare out of control. The British economy contracted 0.2 percent in the final three months of 2011 and is predicted to shrink 0.1 percent in the current quarter, meeting the technical definition of recession. But upbeat manufacturing data released on Wednesday suggests the UK could skirt recession if the sector continues to recover in the coming months.
The Bank of England is expected to announce next week an additional 50 billion pound boost to the 275 billion pounds it has already spent under its quantitative easing programme, designed to boost the money supply and bolster growth.
The Bank will eventually spend 350 billion pounds buying up bonds, a separate Reuters poll found, and that influx of cheap money will have a weakening effect on sterling. The foreign exchange poll painted a similar steady year ahead for the pound against the dollar, although forecasts were again wider than in last month's poll, ranging from $1.33 to $1.73 in a year.
Medians predicted cable at $1.55 in one month, $1.53 in six months and $1.56 in a year, little changed from December's poll. Sterling was hovering near a two-and-a-half-month high against the greenback earlier on Thursday at $1.58, supported by Wednesday's manufacturing data, but dealers warned the likelihood the BoE will announce more QE next week would check the pound's gains. Sterling volatility will rise marginally to 7.5 percent from an actual annualised 7.0 percent in January, the poll predicted. Analysts say the divergence of forecasts in Reuters currency polls offers a leading indicator of exchange rate volatility in the following month.