Investors should sell the euro against the pound as indicators suggest the British currency is poised to strengthen relative to its fair value, according to BNP Paribas SA.
Two interest-rate cuts by the European Central Bank in November and December of last year have eroded the value of the euro, Michael Sneyd, a currency strategist at BNP Paribas in London, wrote in a note to clients. The ECB unexpectedly cut the benchmark interest rate by 25 basis points, or 0.25 percentage point, to 1.25 on Nov. 3 before reducing it again to 1 percent on Dec. 8 in an attempt to stimulate bank lending and fend off a recession.
The euro’s recent rise against the pound provides “an attractive opportunity to short the euro-pound and take advantage of the medium-term outlook for the pound to outperform the euro,” Sneyd wrote, citing the firm’s fair-value model. “Further rate cuts by the ECB in the third quarter are likely to further erode the euro’s yields and drive the euro-pound lower.”
The pound should continue to benefit from its status as a “safe-haven” in Europe and an alternative to the dollar and euro, Sneyd wrote.
Data from the Swiss National Bank show that reserves in the pound have doubled this year, an allocation strategy that could be used by other banks, according to Sneyd. Interventions from the SNB could also place more downward pressure on the euro- pound, he wrote.
The pound rose 0.4 percent to 80.95 pence per euro at 4:46 p.m. in New York. Sterling has fallen 0.9 percent against the euro so far this month after gaining 3.9 percent over the first five months of the year.
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