LONDON — The pound remains the most undervalued major currency and should appreciate to the levels seen in the day’s before Britain voted to leave the European Union by the end of 2018, according to analysts at US investment bank Morgan Stanley.
Morgan Stanley — which is one of the more optimistic sterling forecasters — argued that markets have now priced in Brexit uncertainties.
The bank’s team of strategists, led by Hans W Redeker, wrote in the FX Pulse note:
“GBPUSD is currently around 15% undervalued relative to what PPP models would suggest. We think that Brexit risks are already largely in the price and that negotiations after Article 50 is triggered in March should not have a dramatic negative impact on the currency. The rally in GBP could find further support from the risk-positive environment. We assume limited GBP downside as markets price out the small probability of rate hikes this year.”
As a result of these factors, Morgan Stanley said, sterling should end 2017 with a small gain, before taking off in 2018 and ending the year at $US1.45, a price level last seen in the week before the Brexit vote.
The bank continued, saying:
“Prime Minister May has already set out her plan for Brexit, which includes a chance of walking away if any trade deal is not desirable. That should not come as a shock to markets if it becomes the ultimate outcome. The UK is also currently in a positive situation on negotiating a trade agreement with the US. Brexit headlines will continue, but we believe will have limited impact on GBP.”
Morgan Stanley is confident in its forecasts, but does acknowledge the potential downside risks to its forecasts, suggesting that a “material downturn in UK economic data in an environment of a much stronger US economy could push GBPUSD lower.”
Should Morgan Stanley’s forecast prove true, it would represent a close to 16% rise from its current level.
Opinions on the pound’s relationship with the dollar right now, with many more pessimistic analysts forecasting a substantial further drop in sterling’s value.
Ten days ago, Deutsche Bank’s global co-head of FX research, George Saravelos said in an interview that the bank sees sterling falling another 16% to as low as 1.05 against the dollar, as the “incredibly complicated” nature of Brexit becomes ever more clear.
“Even though intentions are quite positive on both sides, we’re very concerned about the lack of time to complete a deal in two years, and we worry that negotiations will get stuck around this issue of the payment which the UK has to make to leave the EU, and things will stall quite quickly,” he told Bloomberg’s Francine Lacqua.