- Pound to Euro exchange rate today (16/9/16): 1.1770
- Euro to Pound Sterling exchange rate today (16/9/16): 0.8496
- Pound to Dollar exchange rate today (16/9/16): 1.3232
“Within the G5 we believe concerns regarding the economic implications of Brexit were exaggerated, meaning Sterling to perform satisfactorily in coming months.” - Karl Hammer, SEB.
Following the vote to leave the European Union on June 23rd the UK currency's precipitous drop saw it at one stage 20% lower than its pre-referendum levels.
At that stage Sterling discounted a, “virtual disaster for the UK economy”, says analyst Karl Hammer at SEB in Stockholm.
Since these lows were reached the currency has recovered about 4% of the losses.
Hammer believes this sell-off is over-exaggerated in the context of the tenor of the economic that has been released since the EU referendum.
Meanwhile, traders have been agressively betting against the currency ensuring that the bet against Sterling is one of the most overcrowded bet on global foreign exchange markets.
Such overcrowded trades are prone to reversals which can be steep if the market suddenly turns.
“With the speculative market net-short the GBP and absent a significant deterioration we expect a Sterling recovery in coming months,” says Hammer.
Hammer sees UK economic fundamentals as being broadly supportive of the Pound:
“While post-Brexit data are still incomplete and uncertainty remains high, we are quite confident the gloomiest forecasts are unlikely to materialise.
“Long-term the objective is to make the UK a 'super-competitive economy.'"
To some extent the recalibration of the economy following the referendum has actually improved some of the UK’s economic fundamentals.
Sterling is weaker, making UK exports more competitive, lower interest rates have made borrowing even cheaper and liquidity provision by the central bank have all helped the economy.
"Within the G5 we believe concerns regarding the economic implications of Brexit were exaggerated, meaning Sterling to perform satisfactorily in coming months," says Hammer.
However, a word of caution is issued as SEB are more skeptical towards further outperformance in 2017 as real negotiations with the EU start up.
Therefore, this would be considered a longer-term trade.
Pound Sterling Now Undervalued
Studies conducted by the team at SEB suggest that the GBP is currently grossly" undervalued:
“There is no doubt – the GBP is substantially undervalued today, which makes it an interesting long-term valuation case. Clearly current valuation is unsustainable unless the economy suffers badly from the vote,” says Hammer.
As has already been mentioned above the majority of traders are ‘shorting’ the Pound and Hammer points out that this excess positioning to the short-side actually makes it vulnerable and is a signal that an extreme has been reached from which there is likely to be a rebound.
However, Hammer acknowledges that challenges remain and Sterling remains exposed to a fall in foreign capital inflows due to Brexit uncertainty.
The UK current account deficit has widened to around 7% of GDP in the last two quarters and to fund it the country requires vast capital inflows.
“A deficit of the current size is unsustainable, as it requires massive capital inflows to finance the shortage in domestic savings, which makes the GBP vulnerable given present political uncertainty,” says Hammer.
Hammer does not see monetary policy as a potential source of weakness for the Pound, as he expects the Bank of England (BOE) to be reluctant to reduce interest rates unless data starts to show a deterioration in the economy, something which has yet to happen.
“We expect a further bank rate cut at the November meeting to the lower bound of 0.05%.
“However, this reduction is far from certain. Indeed, if economic indicators show that the economy has shrugged off the Brexit vote the Bank would not hesitate to leave its present policy rate unchanged,” he says.
As such, SEB advocate buying the Pound against the Euro and US Dollar.
SEB forecast the GBP/USD exchange rate at 1.28 by the end of 2016 and 1.40 by the end of March 2017.
The GBP/EUR exchange rate is forecast at 1.2346 by the end of this year ahead of 1.2658 at the end of March 2017.