GBP/USD is 9% Undervalued Argue UniCredit, Longer-Term to Remain Rangebound
- Written by: Gary Howes
The British pound is trading below fair value against the US dollar on long-term valuations warns new research from UniCredit.
UniCredit have updated their long-term fair value FX model "BEER by UniCredit" to reflect changes in the underlying fundamental variables.
According to the economic model, the US dollar remains overvalued - a situation that widened considerably in 4Q14-1Q15 in line with the strong USD rally that dominated this period.
The US dollar's overvaluation is seen at around 12% in trade-weighted terms against majors, though there is tentative evidence that it has started to correct.
Convergence towards equilibrium is likely to be a multi-quarter process as major central banks employ policies to keep their currencies weak (vs. the USD) on concerns about global growth and low inflation.
Concerning the pound to dollar exchange rate (GBPUSD) the, "GBP-USD is around 9% undervalued, largely due to an unrealistically wide gap priced in for rate lift-off dates between the Fed and BoE. We anticipate a gradual narrowing of this misalignment in the course of 2016," says Dr. Vasileios Gkionakis, Head of Global FX Strategy at UniCredit in London.
The fair-value estimate for EUR-USD is said to meanwhile be at 1.20. "Undervaluation of the euro will diminish very slowly as QE2 expectations are weighing as the ECB watches the situation closely," says Gkionakis.
Looking at the commodity dollars, the slump in commodity prices has triggered a meaningful drop in commodity FX fair valuation.
"However, brutal depreciation has led to the NZD now being undervalued by 0.9% and CAD undervaluation remains very wide at 11.5%. We expect gradual strengthening of the commodity FX bloc in the course of 2016. NOK undervaluation against the EUR is still sizeable (33.4%)," says Gkionakis.
“BEER by UniCredit” is a Proprietary framework for modeling equilibrium exchange rates in the medium-to-long term.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3337▲ + 0.08%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2884 - 1.2937 |
**Independent Specialist | 1.3151 - 1.3204 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
These are of paramount importance to the bank's clients with medium-to-long term planning horizons as divergences between fair-value estimates and actual FX rates tend to narrow over the medium term.
According to BEER analysis, it takes on average around four years for spot values to approach their "fair" valuation.
The name “BEER by UniCredit” is derived from the Behavioral Equilibrium Exchange Rate model employed, which allows a direct estimation of the relatirelationship between the nominal exchange rate and key macro ingredients:
- Terms-of-trade differentials
- Relative investment as a share of GDP
- Nominal-interest-rate differentials
- Inflation differentials
GBP to USD Rate Heads Higher, Range-Bound Trade Ahead Forecast Lloyds
GBPUSD is presently trending higher and any knee-jerk moves lower are unlikely to be sustained argue Lloyds Bank in a note to clients.
"Losses should be limited to support in the 1.5380/1.5320 region. Stronger data should see a move through 1.5500/1.5540 resistance, opening the 1.5660 previous high set in mid-September," say Lloyds.
Longer-term forecasts from the UK bank suggest it will likely be 'more of the same' from GBP/USD which has traded in a four-point range around 1.55 since May.
"We see little reason for this to change over the coming months. Given the uncertainty over the prospects for monetary policy on both sides of the Atlantic, the inability of GBP/USD to make a decisive break in either direction is perhaps not surprising," say Lloyds.
