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ANZ: British Pound to Dollar Rate 16% Undervalued

Content provided by eFXnews.

The pound sterling is undervalued suggest ANZ Research

The British pound has caught many in the markets by surprise having rallied through April. There is more to come argue strategists at ANZ Research who write the following to clients:

The average of the last seven opinion polls has shown a rise in support in favour of remaining in the EU to +7 points vs +1 in the first half of the month.

In reflection of that, the pound has recouped some lost ground as Brexit anxiety has faded.

However, there are still a large number of undecided voters (approximately 20%) and just over 50 days to go until the referendum (23 June), so it would be naive to assume that sentiment can’t and won’t twist and turn, and sterling appears responsive to that.

If one is of the persuasion that the UK will stay in the EU, there is little doubt that the pound is cheap.

We have highlighted the size of the UK’s c/a deficit (5.2% of GDP) as a headwind.

But the deterioration in the c/a deficit owes much to weakness in mining companies’ earnings.

The underlying trade position in goods and services has fared considerably better.

Using producer prices, GBP is estimated to be some 16% undervalued vs USD.

The 5,10 and 20-yr averages for GBP/USD are 1.57, 1.66, and 1.64 respectively.

If the opinion polls are correct and some of the weakness in Q1 activity is a function of Brexit, then over the medium term, sterling should appreciate.

It would be natural for the pound to reflect less political risk, the data could bounce back, and interest rate expectations could reprice.