From ANZ's latest 'FX Insight' publication this morning in Australia, on sterling:
Main points, in brief:
Price action in sterling suggested the market is struggling to get new mileage out of the hard Brexit story, at least for now
Based on producer prices, sterling is estimated to be 33% undervalued vs USD
- And sterling is also 25% below its average for the past 25 years
It would appear that markets will need something fresh to trade off of if sterling is to go lower in the near term
- It is possible that the forthcoming negotiations (once Article 50 is triggered) could provide that
The robust performance of the UK economy is something that has very much been overshadowed by politics in recent weeks
- The enormous monetary easing has helped to offset Brexit related uncertainty and recent activity indicators have continued to hold up well
Inflation:
- On a 3m annualised basis, CPI inflation is now running at 3.2% y/y - above the BoE's target
- If growth continues to be strong, it might be the case that the BoE might have to reassess its outlook for interest rates
- Any expectations of a tightening in monetary policy could come sooner rather than later and could provide sterling with some support
- it is also possible that real wage growth could fall into negative territory later this year, which would provide a significant headwind for growth
