Forex Flash: Recent GBP decline does not necessarily indicate buying opportunity – UBS

The fact that sterling's absolute NEER according to the BoE's ERI is near 20-year lows should not be interpreted an immediate buy signal as relative trend shifts the valuation is broadly fair. In contrast, what happened in 2008-2009 was a case of spot-NEER reaching extremely undervalued levels (over 30% undervalued versus trend) even factoring the structural changes in the UK post-financial crisis, and this was the point where some consolidation began and buyers came back in.

According to Research Analyst Gareth Berry at UBS, “This is where the EUR/GBP price action perhaps matters a lot more, given the EUR is 48% of the UK's NEER (weightings according to the BoE's latest revision in August 2012), a serious move in the EUR/GBP will really start to push sterling towards the extreme end of valuations, as opposed to the GBP/USD (US is 16% in the basket).”