[BillPaay]

The GBP should underperform its peers in 2010. A short GBP/CHF position is a trade in 2010.

The biggest risks surround the uncertainties over the UK’s debt level and the path of fiscal policy. Market forecasts the lows in GBP around mid-year, as market awaits the UK general election in order for some clarity on how the debt situation will be resolved. Given that sovereign issues are a focus in FX markets, and likely to become increasingly so, this is likely to pressure the currency. The risk scenario would be a hung parliament, and could result in very sharp weaker GBP moves.

While many central banks within the G10 are aiming to withdraw their policy stimulus in the coming year, the BoE has yet to complete its QE programme until 1Q. It is then likely to remain on hold until 4Q and it is slated to be one of the last to exit its emergency easy policy. As a result of this differential, monetary policy is likely to weigh on GBP.

So, while the FX environment may get slightly easier for those who have printed money in 2009, the outlook for the currency is only likely to start improving when there is backing from policymakers. In the UK’s case, this is later in the year than its peers.