GBP/USD: Selling Overdone; Buy On Further Dips – ANZ

The British pound is on the back foot against the greenback, trading at the 1.50 handle. Can it break lower, or is it set for a rebound?

The team at ANZ sees the recent moves as overdone, and explains:

Here is their view, courtesy of eFXnews:

Cable’s plunge in early 2015 looks overdone as the pound is caught up in the disinflation theme, says Australia and New Zealand Banking Group (ANZ).

“Most observations of valuation suggest the pound is undervalued against the USD.  The economy has lost some momentum, but continues to perform favourably versus most of its peers,” ANZ argues.

As such, ANZ thinks that based on the expected growth performance, sterling’s weakness against the USD looks overdone and can probably best be explained by a continued loose monetary stance coupled with political uncertainty.

“Probably the best measure of valuation is the trade position. In the first 9 months of last year, the UK ran an average monthly trade surplus with the US of £860m. The average cable exchange rate over that period was 1.66 and interestingly the average of the past 15 years has been 1.66. That would suggest that the pound is undervalued against the USD at current levels,” ANZ clarifies.

“We therefore caution against becoming bearish on cable at current levels and would view extended near term weakness as a buying opportunity,” ANZ advsies.

“However, political uncertainty and the looming prospect of outright sovereign bond purchases by the ECB are weighing on sentiment fuelling a continued appetite for dollars for the time being,” ANZ adds.

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