GBP/USD: Sterling is fundamentally cheap – CitiBank

Analysts at Citibank consider that the pound could rise back to 1.29-1.34 against the US dollar once the economy and markets return to normal. 

Key Quotes:

“US economy loses 20.5 million job losses in April and the unemployment rate rose to 14.7%, but it was better than expectation and support USD, limiting GBP’s performance.”

“GBPUSD hit a low of 1.2266 but failed to test the pivotal neckline at 1.2247 and then regained the interim break area around 1.2355 at the close. We now see a hammer formation that suggests a real danger of a squeeze higher. Short term resistance may find at 1.2484.”

“When FX volatility is elevated, GBP is high beta to risk-on, risk-off (ro-ro) dynamics. In the short term, heightened risk aversion/ another leg lower in global equity markets will weigh on Sterling. That said, there is no doubt that GBP is fundamentally cheap, and we note the reluctance of Cable to trade <1.18. A return to a more ‘normal’ economic/ market regime should see GBP trade more robustly and drift back towards levels witnessed at the beginning of 2020 (around 1.29-1.34).”

“We expect the MPC to announce another asset purchase envelope of £200bn to be announced on 18 June. But just as the government will phase out the lock-down, the BoE may then slow the pace of purchases, meaning another package in November, as we had previously expected, is less likely now. Sterling fundamentals also underpin a ‘buy on dips” sentiment especially against Asia and Commodity FX.”