SEB Research discusses GBP outlook from valuation perspective. SEB targets GBP/USD at 1.32 and EUR/GBP at 0.89 in 3 months.
"The GBP has been undervalued against the euro and most other G10 currencies since the Brexit referendum in 2016. Today the GBP remains the most undervalued currency among all G10 currencies. According to our long-term fair value model the equilibrium exchange rate for the EUR/GBP is 0.78, while it has moved to 1.57 in the GBP/USD. This suggests that the GBP is undervalued by around 15-20% against major currencies. These results also match the GBP valuation from a competitive perspective, based on relative ULC between the UK and its trading partners," SEB notes.
"Since the Brexit referendum the GBP has traded with a risk premium related to the risk that the UK would leave the EU without a trade deal in place. This would mean tariffs and trade restrictions on its trade with its single most important trading partner, the EU. Still, if the outcome later this year is unfavourable, today’s valuation would not stop further depreciation of the GBP. In contrast if the UK and the EU reach some sort of trade agreement, today’s valuation would not be justified and we should expect the GBP to recover," SEB adds.