FX - GBP forecast update/The pound strikes back

06-01-2012

In the G10 world of free-floating exchange rates, GBP looks to be one of the cheapest currencies compared with long-term averages. In particular, the Bank of International Settlements (BIS) produces a series of Real Effective Exchange Rates (REER), which
show how currencies are trading relative to a whole host of trading partners – not just in nominal terms, but adjusted for relative inflation rates. On this basis, GBP is 13% below its long-term average. While such a deviation could have been justified in the aftermath of the global financial crisis, the question is whether such a valuation can be justified in 2012 – especially when the UK’s largest trading partner, the Eurozone, has some unique challenges. We think not.

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