Is the Euro Sterling exchange rate at fair value?

Today has seen the British pound (GBP) power higher against the Euro thanks to the latest data released from the UK economy that shows the recovery is powering ahead.

The euro sterling rate has slumped 0.7 pct on a day-to-day basis; EUR/GBP is quoted at 0.8403 at 13:12.

The question for those watching the euro pound exchange rate is what is a fair valuation?

(Note: All quotes are spot market quotes; your bank will affix a discretionary spread to the figures when passing on a retail FX rate. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more FX. Please find out more here.)

Stephen Gallo at BMO Capital has released an interesting note on the matter saying that current levels could, indeed, represent fair value for EUR/GBP:

"Based on interest rate swap spreads alone, EUR/GBP appears to be roughly at fair value (0.8350), or just a touch above.  That sub-0.8400 valuation, however, means that UK nominal rates are still firming up, and moving in favour of the GBP.

"For the purposes of our medium-term GBP view which is skewed towards the downside, we are still questioning the importance of plausible feedback loops at work within the UK economy, and what, ultimately, a stronger GBP and higher rates might mean for it. As business investment languishes, links between housing, other asset prices, lending, private consumption and services ultimately appear to be getting stronger. It also seems likely that monetary stimulus would have a role to play here.

"If persistent strength in UK rates and the GBP ignores the potential medium-term consequences of new BoE macro-prudential tools, it also potentially downplays the strength of the feedback loops as well. Housing and other related factors do not have to ‘drive’ the recovery in order to be ‘central’ to it."

Currency markets playing it safe

Turning to the latest price action on global markets, we see currency traders are playing it relatively safe ahead of the key US data releases and ECB policy meeting later this week.  

"We are a little concerned that super low volatility across financial markets might mean the markets are growing complacent about the potential for movement to pick up," says Shaun Osborne at TD Securities

After a poor week last week and looking ahead, TD Securities continue to think that risks are skewed more to the downside for EUR/USD—there are a lot of stale and stranded longs above the market which will cap rallies, US data only has to be OK to keep the “all FOMC meetings are live” idea intact and the ECB will have to acknowledge low inflation and slow growth somehow at Thursday’s policy meeting.  

Intraday, EUR/USD losses are liable to pick up below 1.3465/75.