|GBP: Being cheap is not enough - comment from SEB|
|Tuesday, 14 March 2017|
Richard Falkenhäll, Senior FX Strategist at SEB, the leading Nordic corporate bank, comments on how the upcoming two years of Brexit negotiations will create renewed downward pressures on the GBP, and why being a ‘cheap’ currency won’t be enough to help it recover:
“From a long-term perspective, the GBP is substantially undervalued against most currencies. Our own long-term fair value estimate suggests it is around 20% undervalued against the euro and more than 25% undervalued against the dollar. With UK Prime Minister Theresa May set to trigger Article 50 as a prelude to two years of likely tough divorce negotiations with the EU, sterling faces renewed pressure from markets. Further concerns have probably been exacerbated by proposals from the Scottish First Minister Nicola Sturgeon to set a date for a second referendum on Scottish independence.
“We expect that a harsh tone in upcoming divorce negotiations will weigh on the GBP near-term. Whether this will continue or not in Q2 2017 depends on where market focus will be. A shift to political risks elsewhere could offer some temporary relief, but this should be seen as an opportunity to sell the GBP.
“Our main scenario in the coming months is that downward pressure on the GBP will persist, mostly due to concerns related to Brexit talks and weaker than expected UK growth. One alternative scenario is that the sterling recovers temporarily just because the ‘one-eyed’ market could refocus on some other issue like political risks elsewhere, as it did in February. Nevertheless, such a development is unlikely to be long-lasting. Therefore, the fact that the GBP now appears cheap is insufficient to sustain a credible recovery by the currency at this stage. We recommend selling sterling on any temporary rally triggered by a shift in market focus. We maintain our target for EUR/GBP close to 0.90 and GBP/USD well below 1.20 in Q3.”
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