Being cheap is not enough
March 14, 2017
Vytautas Kielaitis/Shutterstock

Richard Falkenhäll, Senior Foreign Exchange Strategist at SEB, the Nordic corporate bank, comments on how the upcoming two years of Brexit negotiations will create renewed downward pressures on the British pound, and why being a ‘cheap' currency won't be enough to help it recover.

"From a long-term perspective, the GBP is substantially undervalued against most currencies. Our own long-term fair value estimate suggests it is around 20 percent undervalued against the euro and more than 25 percent undervalued against the dollar. With UK Prime Minister Theresa May set to trigger Article 50 as a prelude to two years of likely tough divorce negotiations with the EU, sterling faces renewed pressure from markets. Further concerns have probably been exacerbated by proposals from the Scottish First Minister Nicola Sturgeon to set a date for a second referendum on Scottish independence.

"We expect that a harsh tone in upcoming divorce negotiations will weigh on the GBP near-term. Whether this will continue or not in Q2 2017 depends on where market focus will be. A shift to political risks elsewhere could offer some temporary relief, but this should be seen as an opportunity to sell the GBP.

"Our main scenario in the coming months is that downward pressure on the GBP will persist, mostly due to concerns related to Brexit talks and weaker than expected UK growth. One alternative scenario is that the sterling recovers temporarily just because the ‘one-eyed' market could refocus on some other issue like political risks elsewhere, as it did in February. Nevertheless, such a development is unlikely to be long-lasting.

"Therefore, the fact that the GBP now appears cheap is insufficient to sustain a credible recovery by the currency at this stage. We recommend selling sterling on any temporary rally triggered by a shift in market focus. We maintain our target for EUR/GBP close to 0.90 and GBP/USD well below 1.20 in Q3."





This site, like many others, uses small files called cookies to customize your experience. Cookies appear to be blocked on this browser. Please consider allowing cookies so that you can enjoy more content across globalcustody.net.

How do I enable cookies in my browser?

Internet Explorer
1. Click the Tools button (or press ALT and T on the keyboard), and then click Internet Options.
2. Click the Privacy tab
3. Move the slider away from 'Block all cookies' to a setting you're comfortable with.

Firefox
1. At the top of the Firefox window, click on the Tools menu and select Options...
2. Select the Privacy panel.
3. Set Firefox will: to Use custom settings for history.
4. Make sure Accept cookies from sites is selected.

Safari Browser
1. Click Safari icon in Menu Bar
2. Click Preferences (gear icon)
3. Click Security icon
4. Accept cookies: select Radio button "only from sites I visit"

Chrome
1. Click the menu icon to the right of the address bar (looks like 3 lines)
2. Click Settings
3. Click the "Show advanced settings" tab at the bottom
4. Click the "Content settings..." button in the Privacy section
5. At the top under Cookies make sure it is set to "Allow local data to be set (recommended)"

Opera
1. Click the red O button in the upper left hand corner
2. Select Settings -> Preferences
3. Select the Advanced Tab
4. Select Cookies in the list on the left side
5. Set it to "Accept cookies" or "Accept cookies only from the sites I visit"
6. Click OK

Richard Falkenhäll, Senior Foreign Exchange Strategist at SEB, the Nordic corporate bank, comments on how the upcoming two years of Brexit negotiations will create renewed downward pressures on the British pound, and why being a ‘cheap' currency won't be enough to help it recover.

"From a long-term perspective, the GBP is substantially undervalued against most currencies. Our own long-term fair value estimate suggests it is around 20 percent undervalued against the euro and more than 25 percent undervalued against the dollar. With UK Prime Minister Theresa May set to trigger Article 50 as a prelude to two years of likely tough divorce negotiations with the EU, sterling faces renewed pressure from markets. Further concerns have probably been exacerbated by proposals from the Scottish First Minister Nicola Sturgeon to set a date for a second referendum on Scottish independence.

"We expect that a harsh tone in upcoming divorce negotiations will weigh on the GBP near-term. Whether this will continue or not in Q2 2017 depends on where market focus will be. A shift to political risks elsewhere could offer some temporary relief, but this should be seen as an opportunity to sell the GBP.

"Our main scenario in the coming months is that downward pressure on the GBP will persist, mostly due to concerns related to Brexit talks and weaker than expected UK growth. One alternative scenario is that the sterling recovers temporarily just because the ‘one-eyed' market could refocus on some other issue like political risks elsewhere, as it did in February. Nevertheless, such a development is unlikely to be long-lasting.

"Therefore, the fact that the GBP now appears cheap is insufficient to sustain a credible recovery by the currency at this stage. We recommend selling sterling on any temporary rally triggered by a shift in market focus. We maintain our target for EUR/GBP close to 0.90 and GBP/USD well below 1.20 in Q3."



Free subscription - selected news and optional newsletter
Premium subscription
  • All latest news
  • Latest special reports
  • Your choice of newsletter timing and topics
Full-access magazine subscription
  • 7-year archive of news
  • All past special reports
  • Newsletter with your choice of timing and topics
  • Access to more content across the site