GBP/USD rate is now the most undervalued currency pair the G10 space – MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that in the longer-term, it is important to remember that valuation will matter as far as the UK economy is concerned.

Key Quotes

“During the period of initial shock, valuation of foreign exchange can be discarded but gradually as markets complete the initial adjustment to the new reality, valuation can become important again. Our in-house fair-value estimate for GBP/USD is 1.6400 and relative to other G10 fair-value estimates, the GBP/USD rate is now the most undervalued currency pair the G10 space. This undervaluation can certainly help in acting to limit the extent of further declines going forward.

Another measure of potential scope in direction is the historic deviation from long-term average and on both that measure and a 20/25% deviation from fair-value suggests scope to fall into the mid-1.2000’s on a Brexit correction. However, we find it difficult to argue that Brexit will eventually lead to GBP/USD falling below 1.2000 or certainly below 1.1000.”