GBP continues to outperform alongside the USD – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the pound has been one of the few global currencies which have held up well against the US dollar since the US election.

Key Quotes

“It has resulted in cable remaining relatively stable at around the 1.2500-level. In contrast, the pound has strengthened sharply against other currencies such as the euro. We expect recent trends to continue in the near-term although acknowledge that cable is coming under building pressure to succumb to broad-based US dollar strength which could drag it back towards the 1.2000-level. One supportive factor in cable’s favour is that it is already extremely undervalued which could be helping to dampen further downside potential. According to our long-term PPP model, cable is already trading at more than two standard deviations below fair value which comes in at around the 1.2500-level.”

“Economic fundamentals in the UK at the current juncture do not appear to support even more extreme undervaluation. The UK economy continues to remain “remarkably” resilient in the face of Brexit risks. Retail sales growth has been surging increasing by 2.1% during the three months to the end November compared to the previous three months. Robust personal consumption growth continues to pose upside risks to consensus expectations that economic growth will slow to a weaker pace of expansion. The current Bloomberg consensus is for quarterly GDP growth to slow to an average rate of around 0.2% from the current quarter until the end of next year. In comparison the economy has expanded by a quarterly average rate of 0.6% over the last twelve months to the end of Q3.”

“The ongoing resilience of the UK economy is likely to prevent the BoE from delivering further monetary easing in the near-term which is offering more support for the pound. The BoE maintained its neutral policy bias at yesterday’s policy meeting signalling that policy can respond in either direction to changes in the economic outlook. The pound’s recent rebound has been welcomed by the BoE in so far as it has helped to slightly lower the path for inflation although they reiterated that the there is a limit to the extent that an inflation overshoot can be tolerated. The recent rise in inflation expectations has increased the risk of second round effects which the BoE will continue to monitor closely going forward.”