We retain a constructive medium-term view on sterling - ING

Eren Sengezer FXStreet

"Our base case that 'no deal' will be avoided and that there will be some form of resolution by year-end (either a renegotiated deal or a second referendum – both preceded by an Article 50 extension) makes us constructive on GBP in the medium-term," argue ING analysts.

Key quotes

"This should lead to a higher GBP by end-2019, with the scale of the GBP upside depending on the form of the resolution. Coupled with our constructive EUR/USD view for 2H19, we look for GBP/USD at 1.40."

"In terms of medium-term valuation, and after suffering heavily since early 2016 (the point when the market started pricing in the associated risks stemming from the Brexit referendum), sterling is currently the cheapest G10 currency by a considerable margin and is undervalued by staggering 20% against EUR. The scenario of no Brexit (if voted through in the second referendum) would in our view lead to a compression of around half of the current mis-valuation. This would bring EUR/GBP towards the 0.80 level, particularly in light of the still very short GBP speculative positioning."

"Still, we don’t think it is likely that even in the best case scenario of the UK ultimately staying in the EU sterling would fully close the current valuation gap. This is because the damage to the economy and fundamentals has been already done over the past three years (as evidenced by the fact that the UK economy has been growing at half the speed of the US economy last year) and that all suggests less upside potential for sterling compared to what the fair value suggests."

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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