Pound Undervalued Against Euro Shows Investment Banks' Consensus Forecast

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According to the consensus of investment bank analysts, Pound Sterling is left slightly undervalued relative to the Euro following its recent slide.

Collated forecasts from the world's leading investment banks show the exchange rate will end the third quarter at higher levels, with the median estimate now residing some 70 pips higher than the current level in the spot exchange rate.

The survey of forecasts - available as a free download from payment services firm Corpay - shows that although the median estimate for Pound-Euro is higher, the mean is slightly lower than current levels.

These data suggest the recent fall in the Pound leaves it better balanced from a valuation perspective, and if the 'big brain' is right, it is set for a gentle and modest appreciation trend into the quarter-end.

Looking at some of the more gutsy calls amongst the investment banks, LBW Bank remains the bull in the pack, holding out for a peak at 1.22 by the end of the third quarter. Amongst the bears, UK high street name Santander thinks a return to 1.15 is possible by the end of September.

Having a median and mean forecast from over 30 of the world's best analysts allows us to gauge the scale of August's fall and assess how this has impacted perceptions of Pound Sterling's value.

The Pound to Euro exchange rate fell 2.30% peak-to-trough at one stage earlier this month, with declines following a Bank of England interest rate cut that prompted investors to reduce a significant long exposure to the British Pound.

Above: GBP/EUR's recent fall leaves it short of the median consensus forecast of the world's investment banks.

The subsequent technical rebalancing in the market has left positioning somewhat cleaner, and the Pound has recovered about half of its decline to trade at around 1.1730 at the time of writing.

"Last week's market correction has likely already washed out (modest) GBP long positioning and is now offering better levels to re-engage in longs (particularly versus the EUR). We hence recommend going short EURGBP," Barclays strategists said in a recent note.

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Those analysts who think the Pound can end the third quarter higher than it currently trades say the UK's relatively high interest rates can underpin the currency over the coming weeks.

"GBP remains the best performing G10 currency year-to-date. The fundamental/secular positives remain the same and we are reassured that recent weakness has not been a reflection of the UK outlook," says Bank of America in a recent note.

It was reported last week that the UK economy experienced a strong first half of the year as GDP grew 0.6% over the three months to June. It was also reported the unemployment rate fell to 4.2% in June from 4.4% in May, bolstered by a higher-than-expected pace of hiring.

These data will lessen the need for the Bank of England to deliver back-to-back interest rate cuts in 2024, further bolstering UK interest rate expectations and the Pound.

"A rebounding labour market would, all else equal, boost wage forecasts for 2025. Indeed, some surveys suggest pay growth has picked up momentum in recent months," says Rob Wood, UK Economist at Pantheon Macroeconomics. "All told, we see a high probability the MPC will keep interest rates on hold in September. We forecast a cut in November if growth or inflation fails to surprise significantly to the upside."