LONDON — The pound is looking “extremely undervalued” against the euro, economists at UBS Wealth Management said.
Writing to clients on Wednesday, Dean Turner said that if investors were to look beyond the noise created by Brexit talks they would see that there is value in the UK’s downtrodden currency.
The pound dropped to its lowest level since 2010 on Wednesday — excluding a very brief period during last October’s flash crash — as the strengthening single currency continued to punish the pound, reflecting the diverging economic fortunes of Britain and the eurozone since the Brexit vote.
While the single currency area prospers — growth in Q2 exceeded expectations and ran at an annualised rate of 2.2% — the UK’s currency is weak, growth is subdued and many see all risks to the economy as being to the downside.
Turner said there are reasons to believe that the pound could be on its way up in the near future, and that it really should be worth more.
“I am often asked how much further the pound can fall,” he said.
“‘Don’t fight the tape’ is a phrase that springs to mind. Nonetheless, sterling looks extremely undervalued on most measures. Brexit will change the UK’s current trade relationship with the EU, but everything has its price.”
“Indicators for the manufacturing sector show that the weaker currency is boosting export demand. It should also make the UK a relatively attractive place for foreign companies to invest. Political noise ebbs and flows and, with it, exchange rates.”
Turner’s view contrasts with that of Morgan Stanley’s Hans W Redeker, who wrote in a briefing last week that he and his team expect the pound and the euro to move beyond parity — meaning that €1 is worth more than £1 for the first time ever — next year.
On the one hand, Morgan Stanley argued, the euro’s historic move beyond parity with the pound will be driven by continually increasing confidence in the eurozone economy, which will prompt major currency buyers to add a greater allocation of the euro to their portfolios.
However, what will also drive the move is the weakness currently apparent in the British economy and the uncertainty surrounding Brexit negotiations, both of which will drive down the value of the pound.
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