Cheaper pound may challenge case for currency’s darker outlook
The currency is currently undervalued by almost 19 percent against the dollar and by 8 percent against the euro
London: The pound is looking increasingly cheap.
The currency is currently undervalued by almost 19 per cent against the dollar and by 8 per cent against the euro, according to the Big Mac purchasing-power parity model. Underwhelming UK economic data and the dwindling prospects of interest-rate hikes from the Bank of England have driven sterling to the lowest level this year at around $1.33 (Dh4.88).
“The very weak valuation by historical standards makes investors hesitant to believe in more structural sterling downside,” said Andreas Steno Larsen, a currency strategist at Nordea Bank AB.
While Brexit continues to loom as a risk, the transition agreement signed earlier this year has lowered the threat of the UK leaving the European Union without any sort of deal, removing a reason for longer-term pound pessimism. One-year euro-sterling risk reversal option contracts, a measure of market positioning and sentiment, are the least negative on the pound in 11 months.
“The need to hedge a sharp pound depreciation over a one-year horizon is much lower,” said Viraj Patel, a currency analyst at ING Groep NV.
