Forex Flash: EUR/GBP eyes 1m target of 0.8700 – UBS

FXstreet.com (Barcelona) - According to Research Analyst Gareth Berry at UBS, "Buried at the end of Thursday's policy statement was the news that the Bank of England will follow in the Fed's footsteps and engage in a reinvestment program of its own. The proceeds of maturing Gilts held in the Asset Purchase Facility will be used to fund fresh asset purchases, keeping Gilt holdings steady. As such, the balance sheet will not be allowed to contract gracefully of its own accord, and will be more or less frozen in time at an elevated level."

This is not a UK-style Operation Twist - after all the BoE is not selling front-end Gilts before they mature so as to reinvest the proceeds further out the curve. So there is no significant additional easing here.

However, "with the ECB now downsizing its balance sheet as banks surrender surplus LTRO liquidity, policy is arguably starting to diverge. In some quarters this will be seen as a case for the EURGBP upside (although the reality is far more complex, and there are other reasons to believe our 1m EURGBP target of 0.8700 is attainable)." Berry adds.