FX Alpha 03 December 2013

GBP: It’s a buy it up situation

Improvements in UK economic data, improving sentiment and still light positioning mean that sterling’s rally is nowhere near done yet.

It seems that GBP is enjoying something of an Indian summer. Since September the pound
has been amongst the best performing currencies in G10 and has defied predictions of a pullback
by a majority of analysts. In our view not only is the pound’s strength justified on a fundamental
basis but in fact there is more to come. Coming into 2013 the pound lost ground as the
combination of low growth and relatively high inflation (at least higher than peer countries) took
its toll. In addition to this the amelioration of the euro zone crisis weakened safe haven flows
towards the UK, which benefitted GBP over the course of 2011 and 2012. This led to a pronounced
sterling sell off with EUR-GBP edging towards highs around 0.88 in February. Our
view then was that rallies in this region would not be sustained and this has proven to be the
case. On a PPP basis the pound is simply too cheap at those levels.

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