Pound Sterling Today: “Undervalued” Pound May Still Be A Buying Opportunity


EURO = 0.8575

STG = 1.1175


UK services PMI impresses

In what is just the latest in a run of better than expected UK data, the British economy posted another better than forecast reading in the form of the UK services PMI which is an extremely important eco-stat given how crucial services are in particular to the UK economy. With retail sales and services both outperforming expectations, the bulls will be cautiously having their hopes restored that perhaps the Bank of England might not be done hiking this year after all. Cable jumped nearly 0.5% after Tuesday’s PMI but the gains were somewhat stuck around the recent highs in the mid 1.33 level. In their recent currency forecast for 2018, forex analysts at SEB are keeping their bullish calls alive for Sterling, apparently centred mostly around their belief that Brexit talks may see the UK with a deal by the end of the year,

“The GBP is long-term undervalued against most currencies as Brexit uncertainty keeps the GBP under pressure. Negotiations about the final deal is likely to take two steps forward and one step back before a final deal is settled towards year-end.”

SEB forecast Pound at 1.50 against the Dollar next year

The call is quite a conservative one, however, as even though they see GBP/USD at 1.50 by the end of 2019, they do not appear to rule out the risks of it dipping below 1.30 in the near term, even if they believe a final deal is still in the offing,

“We still believe there eventually will be a deal as costs of failing are too high. Have some patience and buy the GBP on levels below 1.30 targeting 1.50 by end of 2019.”

It is in the area of monetary policy where SEB also believe the Pound is likely to continue to lose support, as their report indicates that inflation lagging expectations is likely to continue to keep the Bank of England on hold, and the long-term bulls now no longer see much hope of a rate hike this year in the UK,

“Slower growth and a much faster decline in inflation than the BOE forecast in February have altered the monetary policy outlook. We no longer expect tighter policy this year, unless wage growth accelerates significantly. With market pricing still indicating roughly one hike by the BOE this year, possible disappointments could weaken the GBP going forward”

A weaker Pound certainly looks likely while the US Dollar’s fundamentals continue to steadily improve. The UK may benefit from Italian troubles as the EU appears less stable, but this is not clear as it may prompt harsher treatment from Brussels. For now, the Pound may is looking a cautious out-performer among the European currencies.

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