GBP: Reiterating medium-term upside – BNPP

Sam Lynton-Brown, FX Strategist at BNP Paribas, notes that the Sterling has been the best performing currency since the start of November, supported by: the Bank of England moving from an easing to a neutral bias, the UK High Court ruling that parliament has to approve the invocation of Article 50 to leave the EU, and – linked to the previous point – the government’s EU negotiation stance seemingly becoming less geared towards a ‘hard Brexit’.

Key Quotes

“Another supportive factor for the GBP is the apparent breakdown of the correlation between reserve depletion and GBP selling. Many market commentators suggest that EM reserve depletion requires the automatic selling of reserve currencies. In 2015, the periods of elevated EM reserve depletion corresponded with GBPUSD consistently and significantly undershooting its fair value implied by rates, equities and commodities.” 

“However, since the US election, despite expected EM reserve depletion, the relationship with GBPUSD has broken down. This suggests reserve managers do not want to significantly reduce further their GBP holdings, consistent with our structural fair-value model BNP Paribas FEER, highlighting that GBPUSD is extremely cheap from a long-term fair value perspective.”