RBS still look for the pound dollar rate to weaken as GBP re-establishes its historical correlation with Euro-zone periphery stress and UK bank share prices.
The pound dollar exchange rate is 0.118% higher on the day with 1 GBP = 1.6138 USD.
The pound euro exchange rate is 0.508% lower with 1 GBP = 1.1346 EUR.
"Having softened into their release, GBP rallied on the BoE Minutes with the market disappointed they were not more dovish. The text suggests that the MPC are still in wait-and-see mode for the time being and so there is unlikely to be any shift in policy until early 2012," says a note from the currency team at RBS.
With GBP USD currently trading over two standard deviations rich to fair value, RBS still look for this pair to weaken as GBP re-establishes its historical correlation with Euro-zone periphery stress and UK bank share prices.
A 'grand compromise' in the US in which the debt ceiling is raised and a long-term deal is agreed to reduce the deficit would most likely be quite positive for the USD suggest RBS.
This is a positive given that fiscal tightening would be gradual and commenced in the future, combined with the continuation of the US's AAA rating and a sense of long-term fiscal stability.
"However, a rise in the debt ceiling without a budget compromise should also not be sufficient to derail our bullish outlook for the USD in the second half of the year given our expectations of strengthening US growth and interest rates. Despite not ruling out the prospect of an upside surprise for the EUR arising from Thursday's EU summit, we continue to recommend selling EUR/USD into rallies," say RBS.
