From Barclays’ economists – ‘European Economic Quarterly’ report.

Their main points (bolding is mine):

Global Outlook: As growth recovers, central banks part ways

  • Forecast an acceleration of global growth in H2, on the back of upgraded China growth, stabilizing activity in Japan and a rebound in US growth (albeit less than the optimistic consensus expects)
  • US inflation will increase more rapidly than the Fed forecasts,in our view. This should bring Fed hikes closer, not dissimilar to the way better data have affected the BoE, which we now see hiking before year end
  • China’s growth rebound, coming on the back of a significant re-easing of policies, should support growth in the rest of EM (emerging markets)
  • While dynamics in EM Asia are promising, growth in Russia, Brazil and South Africa is weighed down by structural challenges
  • Oil prices present a risk to our outlook. After a period of stability, Iraq-related supply risks combined with low inventories and limited spare capacity have the potential to create a lasting spike in prices inventories and limited spare capacity have the potential to create a lasting spike in prices

More on the UK:

  • Business surveys continue to point to strong growth in Q2 and Q3
  • Investment is growing robustly and is expected to sustain its meaningful contribution to GDP growth
  • We have brought forward our forecast for the first rate hike by the BoE’s MPC to Q4 14 from Q2 15 previously
  • There are political risks related to the Scottish independence referendum, the general elections, and a potential EU membership referendum

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Implications for FX: Long-term fundamental and ECB action

  • Real interest rate differentials have been an important source of support for the EUR as bank deleveraging accelerated euro-area disinflation. The ECB’s commitment – in word and deed – to do “whatever it takes” to raise inflation is already bearing fruit in turning inflation expectations. As inflation expectations, and later inflation, turn, real interest rates in the euro area should fall relative to other G-10 currencies, leading to trend EUR depreciation.
  • The ECB’s “Odyssian” commitment through 4year TLTRO to low interest rates for an extended period stands in stark contrast to the Fed’s removal of its long-term commitment. Protracted lower rates should reinforce the trend of a lower EUR, as does the re-widening of EURUSD basis in favour of EUR borrowers.