FX.co ★ The pound is overvalued by 20%, the euro by 10%. The bottom is yet to be found

The pound is overvalued by 20%, the euro by 10%. The bottom is yet to be found

The pound is overvalued by 20%, the euro by 10%. The bottom is yet to be found

The recent fall of the pound to new historical lows has caused a big wave of concern. Now the British dollar is recovering, but the structural problems dominating the fall of sterling have not gone away.

"The UK's main balance sheet has shrunk dramatically over the past two years from a surplus of 2% of GDP to a deficit of 8% of GDP. This requires a greater inflow of short-term capital to keep the British pound from a strong and prolonged fall," HSBC writes.

"If foreign investors fear that the unbearable debt burden will be paid for by inflation or currency depreciation, they may not be so willing to finance it in the first place. This indicates the possibility of an even greater drawdown of the currency," analysts add.

After the correction, the British currency will continue to fall. There are no factors, both internal and external, for the recovery of the British currency. From current levels, the pound may be overvalued by more than 20%.

The GBP/USD pair fell to a new low of 1.0354 last week. TD Securities estimates that the pound should trade around the 1.0450 mark, assuming short-term consolidation.

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The pound is overvalued by 20%, the euro by 10%. The bottom is yet to be found

However, this is a basic scenario, not an exact science. Much here will depend on the credibility of the UK government and the degree of pressure from the double deficit.

Economists see the impact on the trade-weighted pound of about 1.5 percentage points for every percentage point of an increase in the expected budget deficit.

"The budget forecast provides for an increase in borrowing by 6.5% of GDP this year and next, plus another 7% of GDP over the next three years. This means that the pound must fall by about 20% to reach its new equilibrium," TD Securities comments

Britain's borrowing needs have increased after the announcement of marginal energy prices for households and businesses, as well as tax cuts.

The country's state borrowing, according to calculations by Deutsche Bank, will increase to 185 billion pounds, or 7.5% of GDP, in the next two years. In the current financial year, despite the fact that half the way has already been passed, borrowing can be revised by almost 85 billion pounds.

The growth of the budget deficit is accompanied by a historically stretched current account deficit.

"The current account balances of the eurozone and the UK have deteriorated significantly. The euro is still overvalued by 10%, while the pound, given the large deterioration in the current account, by 20%," IIF economists write.

The pound will remain under pressure in the near future. Neither the Bank of England's plans for emergency bond purchases nor rate hikes will stop the machine running.

BBH predicts another test by the GBP/USD pair of the recently broken new low at 1.0350. In the near future, it may seem that the pound has begun to stabilize, but this will not last long.

The pound is overvalued by 20%, the euro by 10%. The bottom is yet to be found

As for the euro, bulls managed to recover some of the losses after the EUR/USD pair touched the lowest level in more than two decades at 0.9535.

If the euro fails to confirm levels above 0.9950 as resistance, the quote may continue to fall to 0.9900, and then to 0.9850.

The dollar, which seems to be taking a break in the rally, will allow the euro and the pound to exhale a little before falling again.

The US currency index on Wednesday reached new 20-year highs in the area of 114.75, from where a wave of downward correction began. The indicator failed to ignore obvious overbought signals for a long time.

In general, nothing threatens the upward trend. The dollar is likely to continue heading to the upside, first to the round level of 115.00, preceding the May 2002 peak at 115.30.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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