GBP/USD: CONTINUED INVESTOR INTEREST IN THE CARRY TRADE SHOULD KEEP POUND STERLING REASONABLY WELL BID – ING

Expectations on the March 6 UK Budget may slowly start to feed into the Pound Sterling (GBP) price action. Economists at ING analyze how the Spring Budget could impact the GBP.

GBP would again come under pressure were Chancellor Hunt to misread the mood of gilt investors

Continued investor interest in the carry trade should keep Sterling reasonably well bid. And given our medium-term fair value calculations that GBP/USD is some 7% undervalued and that the Dollar will roll lower later this year, we remain happy with a 12-month target at just over 1.3000.

Were Chancellor Hunt to misread the mood of gilt investors and cause another upset, Sterling would again come under pressure. Short-term models suggest a 2% sell-off in Sterling could happen quite easily were investors to again demand a risk premium of Sterling asset markets. 

On the positive side for Sterling, there is some speculation that Chancellor Hunt is looking at improving incentives for global multinationals to list in the UK or for British savers to direct investments towards UK asset markets as well. These measures probably will not quite extend as far as the US Homeland Investment Act – a major support for the Dollar – but should be monitored nonetheless.