GBP has been undervalued - SocGen

Kit Juckes, Research Analyst at Societe Generale, points out that for the 30years before the Brexit referendum, sterling was on average, 14% overvalued on a PPP basis relative to the US dollar, but since the vote, it has been undervalued, by an average of 12%.

Key Quotes

“The FX market’s verdict on Brexit is crystal clear – it’s very bad indeed. The current degree of undervaluation against the dollar hasn’t been seen since 1986. The historical context only matters because it explains much of the pound’s reaction to the news that common ground may have been reached on a Brexit divorce bill. On its own, that is ‘good news’ but not gamechanging.”

“Agreeing a way forward on the border between the Irish Republic and the UK is a bigger challenge at this point, and still stands in the way of moving on to the next stage of negotiations. But sterling’s current valuation is so poor that any small piece of good news is enough to trigger a disproportionate response. Just imagine what would happen if there were any genuinely positive news.”