Pound a Solid "Contrarian" Bet Against the Dollar for Early 2020: BofA

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- More GBP/USD gains ahead say Bank of America

- Sterling seen as substantially undervalued

- EUR/USD could also benefit from Brexit deal

Foreign exchange strategists at Bank of America Global Research have confirmed they remains positioned for a further recovery in the Pound against the U.S. Dollar, describing the stance as one of their "best contrarian G10 FX trades" for the foreseeable future.

In a briefing to clients, BofA Global Research say the attractiveness of Sterling largely resides with the risk of a 'no deal' Brexit having declined substantially over recent months.

And while the Pound has been rising in value since August, "we expect further upside," says Kamal Sharma, an analyst at BofA Global Research.

Expectations for further gains come as researchers say Sterling remains substantially undervalued, particularly against the U.S. Dollar, where equilibrium estimates suggest the exchange rate should be at 1.50 under a no Brexit scenario.

"This suggests that GBP will be permanently lower after Brexit, but most likely above current levels in a deal scenario," says Sharma.

Researchers at the investment bank are forecasting the Pound-to-Dollar exchange rate to reach 1.35 following the achievement of a Brexit deal.

"Although we don't expect GBP to appreciate anywhere near pre-referendum levels, it is substantially weak in real effective terms compared with its own history and compared with UK GDP growth. This reflects some tail risks in our view, which we would expect to be priced out following a deal," says Sharma.

A survey of global fund managers conducted by Bank of America suggest fund managers are substantially underweight in their exposure to UK assets: i.e. there is scope for global investors to pick up their investment exposure to the country, should they wish.

Typically, the a surge in inward investment would trigger an ongoing bid in the value of Sterling.

The U.S. Dollar is chosen as the most optimal currency to trade exposure to Sterling as the other major liquid currency - the Euro - is also considered to be undervalued.

The Euro could therefore also benefit from a Brexit deal, meaning that the potential gains in a GBP/EUR trade would underwhelm when compared to a GBP/USD trade.

There are of course risks to the pro-GBP/USD view, and these include an increase in trade tensions, which typically benefit the U.S. Dollar. Furthermore, "failure to conclude a Brexit deal after the UK elections, which would weaken GBP substantially," says Sharma.

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