Continued investor interest in carry trade will keep Pound Sterling reasonably well bid – ING

Expectations for the UK budget on March 6 may slowly be starting to be reflected in sterling (GBP) price movements. ING economists analyze how the spring budget could impact the GBP.

If Prime Minister Hunt misunderstands the sentiment of gilt investors, GBP could come under pressure again.

Continued investor interest in the carry trade should keep sterling reasonably well bid. And given our medium-term fair value calculations, which suggest that GBP/USD is undervalued by about 7% and that the dollar will decline later this year, we remain comfortable with our 12-month target of just over 1.3000.

If Prime Minister Hunt misreads the mood of gold investors and causes another upset, sterling could come under pressure again. Short-term models suggest that a 2% sell-off in sterling could very easily occur if investors demand the risk premium back into the sterling asset market.

On the positive side for sterling, there is speculation that Prime Minister Hunt is looking at improving incentives for global multinationals to list in the UK or for UK depositors to invest directly in UK asset markets. These measures probably will not extend to the American Homeland Investment Act, a major support for the dollar, but should be monitored nonetheless.