GBP Above Fair Value vs USD: Pound Dollar Exchange Rate Due a Fall Warn Barclays

The Pound to US dollar exchange rate (GBP/USD) is currently trading above fair value as markets mis-price Bank of England policy.

Barclays have today confirmed to currency markets that they believe their valuation of the pound dollar exchange rate is misplaced.

A note issued by the bank suggests that fair value for the GBP/USD in fact lies at 1.64.

The pound to dollar rate is currently seen at 1.6607.

(Note, the USD quotes here are taken from the wholesale currency markets. Your bank will affix a spread at their discretion when passing on a retail rate. However, an independent FX provider will guarantee to undercut your banks offer, thus delivering up to 5% more currency. Find out more here).

GBP/USD above fair value

According to Barclays analyst Chris Walker the GBP/USD is currently above fair value, it is their belief that the rate will decline in coming months:

"Given the risks of a correction lower in GBP/USD over the coming weeks as anticipated flows are matched with GBP supply (in line with previous M&A deals) and relatively stretched market pricing, we see good risk-reward in positioning for tactical GBP/USD downside via options.

"While we would not want to sell GBP/USD spot, given the upcoming potential inflows, we like the optionality of owning GBP downside over six weeks, by which time we expect GBP/USD to have corrected towards its near-term ‘fair’ value (which we forecast at 1.6400)."

Barclays take Dovish approach to MPC communication

Walker says Barclays view this pound dollar forecast level as being consistent with the relative outlooks for monetary policy.

"Our interpretation of the MPC’s February QIR was ostensibly dovish, given the MPC’s explicit signal to read through the improvements in the labour market and instead focus on the degree of slack in the economy," says Walker.

Further, "the subsequent rally in GBP following the release was likely more generally a function of a
perceived lack of credibility associated with the policy framework changes. We have also argued that inflation remains crucial to the outlook for GBP. On that note, our economists have revised their CPI forecast profile lower and now expect it to undershoot the BoE’s. This may be a more effective tool than the MPC’s current guidance in pushing back near-term rate expectations."