FX comment: Honeymoon is already over for sterling

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ published a report Thursday calling for a further move down in GBP/USD to 1.3800. Halpenny is conscious that “the pound does look under-valued when analysed against other major floating currencies. However, the more extreme under-valuation is against commodity-based currencies rather than against the dollar.” The analysis seems largely to hinge on the relative gloom expressed in Wednesday’s Bank of England quarterly inflation report (QIR). Meanwhile, his comment on the coalition policy document is largely positive: “Both the Conservatives and the Lib Dems appear to have agreed on the need for a substantial package of austerity measures”, although one does wonder whether austerity or laxity would be worse for sterling in the short-term.