The outlook for the pound is closely related to the probability of monetary policy tightening by the Bank of England, Hammer noted.
“However, both low inflation and signs it will be some time before inflation rises towards the Bank of England target have clearly postponed any action from the Bank of England until 2017. This could potentially contribute to further GBP weakness in coming months. The referendum on EU membership has also created political uncertainty and is negative for the currency,” he said.
In terms of the dollar, further rate hikes from the Fed later this year and easing by other central banks should sufficiently support the dollar to finally push it through the recent EUR/USD lows at 1.05, said Hammer. Meanwhile, the euro will continue to hold up very well but new downside risks are on the horizon, according to Hammer.
But overall, market fears so far this year are exaggerated, in Hammer’s view. “Global monetary policy remains very loose. So far only the Federal Reserve has stated it is considering tightening policy and then only gradually. Growth in both the US and Europe are expected to remain reasonable this year with the latter expanding more rapidly than at any time since 2010,” said Hammer.
Meanwhile, he says the rubel remains highly correlated to global oil prices and with Brent set to average $25 per barrel in Q1, the currency strategist sees the dollar/rubel ratio hovering around 82.00 also in Q1, before firming to 80.00 in Q2 and 74.00 in H2-16 on the back of a slight recovery in oil prices.
“For G10 currencies stabilising risk appetite and oil prices mean traders can focus on what matters; the growth outlook, monetary policy and valuation,” said Hammer. “We expect some oversold commodity currencies to partly reverse losses to date. Further, as the ECB has promised to do more, the euro remains a funding currency,” he added.
