ANZ Research discusses GBP outlook and targets GBP/USD at 1.40 in 2021.
"Despite the UK’s uncertain post-EU future, sterling is trading firmly against the dollar and holding its own on the crosses. By any measure of valuation, the pound is cheap (long run post-EMU average is 1.58 vs USD). But the transition the economy faces, amid tighter fiscal constraints, suggests sustained currency undervaluation would be optimal, from a policy perspective. Domestic inflation pressures are muted, the balance of payments deficit will widen again as the economy recovers and the BoE is examining the feasibility of negative interest rates.
"The backdrop of a large financing requirement and negative real interest rates provides a theoretical and practical framework for GBP undervaluation to continue. Sterling could provide good trading opportunities as the economy moves to post-Brexit equilibrium," ANZ adds.