Pound may be undervalued

6 February, 2017

The British pound has dropped down through the $1.2500 mark today in European trading on the back of disappointing local data, but some are predicting a bottom is forming and there is substantial upside to come.

At 2.04pm (GMT) the British currency was trading at $1.2481 down from $1.2535 in yesterday’s trading.

The Markit services purchasing manager/s index (PMI) hit the market earlier today at 54.5 against analysts’ expectations for a number of 55.8, and may justify the BOE’s neutral stance on lifting interest rates any time soon.

Although the pound may experience further pressure in the nearest future a number of analysts including Kamal Sharma, an FX Strategist with Bank of America Merrill Lynch Global Research in London think that the worst days are over,

“Although we retain a near-term bias for further GBP weakness, we think the medium-term fundamentals look more positive,” Mr Sharma said

"As a result, the divergences between these key drivers and GBP, which have built up as political risk premium has dominated price action, could be closed. In our view, with some of main pillars that have historically driven GBP through the business cycle remaining resilient to the Brexit shock, the upside risks to Sterling are building,” he added.

He also noted that the pound has failed to follow in the footsteps of an improving jobs market and a continuation of growth in the real estate sector and this may be another factor for the currency to rise,

“GBP looks cheap versus macro drivers such as the labour & property market and against the backdrop of improving global growth,” he added.


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