Nordea calls support for GBP ahead of Brexit vote

Sterling as a currency is already undervalued despite fears around the outcome of the UK referendum on its EU membership, scheduled for 23 June, according to the views of

She makes the point in a note looking at factors affecting the currency, in light of latest UK current account deficit numbers. Sterling has weakened, but she adds that “we may be getting to the beginning of the end of increasing the net shorts” positions being taken in the market.

“The valuation is GBP supportive ahead of the 23 June Brexit referendum. The short-term fair value models point to levels of EUR/GBP below 0.77. Even our long-term PPP model suggests that EUR/GBP is undervalued (fair value at around 0.72). Thus in the short term the GBP should strengthen in that direction. We stick to our call – GBP/USD is on the way to 1.46-1.48 in the coming few months,” wrote in a note.

The latest current account figures suggest the country is more dependent on foreign capital flows. However, the argument could also be put the other way round: it suggestst that investors are willing to fund the deficit. Thus, the widening of the deficit could also be read as “a sign that foreign financing has been increasing.”

There are also signs that the UK economy is more robust than some have called: industrial data has recently indicated a slowing, but the housing market remains solid, and wage growth is rising. Should wage growth continue, it could bring the Bank of England to implement a rate hike sooner than current consensus suggests.

“Inflation is rising again and inflation expectations are well anchored. The GBP weakness is already contributing to higher inflation and should push headline inflation higher in the months ahead.”

 

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