FXStreet (Edinburgh) - In the view of Jane Foley, Senior Currency Strategist at Rabobank, the cross could head towards 0.77 at the end of 2014.

Key Quotes

“Sterling’s success has clearly been built upon the strength of UK activity data since the second half of last year, but the tone of the BoE is a significant contributor to the buoyant tone of the pound”.

EUR/GBP provides even more reason for not judging the pound as overvalued. EUR/GBP is still well above the levels that persisted since the introduction of the EUR in 1999 and the crisis in 2008. The average level for EUR/GBP between the start of EMU and Jan 2008 was 0.66. If the BoE were the scream that sterling’s recent gains were an injustice, it would have very little ground to stand on”.

“While the strength of UK activity data provides a good explanation for the strength of the pound, it is not the whole story. The continued sluggishness of the USD has facilitated cable’s rise just as it has supported EUR/USD and coincidentally inhibited upside potential in USD/JPY”.

“The dollar aside, the discussion over when the BoE will announce its first rate hike of the cycle is crucial for the outlook for cable”.

“Although we now find ourselves a little less hawkish than the market consensus, we maintain our expectation that sterling will remain well supported going forward and see scope for cable to hold the 1.72 area until early next year”.

“Since the ECB has committed itself to fighting disinflation aggressively it appears that irrespective of precisely when the BoE chooses to start hiking interest rates that it will tighten well before the ECB. We see scope for EUR/GBP to move towards 0.78 by year end and slowly onwards towards 0.77 on a 12 mth view”.

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