Recently, the pound strengthened significantly against the USD, mainly driven by momentum. From a value perspective, economists at HSBC believe the recent GBP strength is not justified and the cable appears to be overstretched.
“The UK’s economic recovery remains lacklustre compared to others. The HSBC UK activity surprise index is one of the few trending sideways, not up, showing that the economy is not outperforming expectations in the way the US or Eurozone are.”
“UK forward rates have risen this year with negative rates being priced out, but the move has been largely in line with what has happened in other G10 rates markets, especially the US. As rate differentials are what should matter for FX, the rate move does not justify the significant rally in the GBP.”
“UK equities remain a laggard suggesting that it is not foreign equities inflows driving GBP outperformance.”
“Momentum is clearly a powerful force in FX but we have built a value case for why the GBP is overstretched and that case does not change until the fundamentals behind it change. For a currency, the danger in exceeding your grasp is not that you reach heaven but that you get a nasty fall back to reality when the momentum wanes.”