Sterling is majorly undervalued and will rise in 2018! Growth forecasts and data will become more important now…

One of the key points in yesterday’s budget was the OBR (Office of Budget Responsibility) revising down growth forecasts. Today we have the latest UK GDP (Gross Domestic Product) data for Q3 which last time came in at 0.4% surprising markets and helping the pound rise. This morning’s data at 09.30 am carries a little more weight now as investors wish to understand better Philip Hammond and the OBR’s assessment of the UK economy.

Personally I think the forecasts by the OBR are too pessimistic. It appears the UK economy with high employment and rising growth is actually on a much firmer footing nearly 18 months since the vote to leave. Yes there are some difficult times ahead but day by day we seem to be creeping to a Brexit where the worst fears may not be realised.

So far the UK economy has this year grown 1.5% with one quarter to go. The OBR is predicting for the next three years 1.5%, 1.4% and 1.3%. I feel however as business gets clarity and consumers shrug off fears over Brexit that we will actually see better data than this. I think the OBR has been too grim in its assessments because actually the global economy is growing, indeed growth in the Eurozone actually outperformed the United States over the last year with 2.5% growth.

Whilst the UK has voted to leave the EU nothing is changing materially between the countries until probably 2021. The EU will remain the UK’s biggest trading partner and if they are growing then so will we! The generally weaker pound makes us a much more attractive investment position.  Don’t forget the UK has one of the most flexible labour markets in the world so we can adapt to the potentially changing nature of Brexit and the growing global economy.

Sterling will remain at the mercy of market sentiments over Brexit but I do feel that now perhaps sterling has bottomed out or the risk of any moves lower are much more limited. At some point in the coming year there will be more clarity over the deal the UK gets and this will help sterling.

For clients holding on to buy the pound waiting on a big move lower (for example parity on GBPEUR) you could risk the favourable levels in front of you.

Thank you for reading this post and if you have a transfer buying or selling the pound and wish to discuss the pound sterling forecast then please get in touch with me directly on jmw@currencies.co.uk.