FxWirePro: EUR valuations still seem slightly rich and sterling no longer cheaper but edgy in long-term fair value projections of G10 space

GBP is no longer the cheapest G10 currency and still has room to cheapen further if political risks intensify. The same is true for EUR where valuations are still near fair value despite underperformance in the past month.

The notable G10 outperformers since our last publication have been JPY and GBP, while EUR has underperformed. JPY was rich relative to fair value in this framework, to begin with, but with this outperformance has moved up in rank and is now the third richest currency in G10 overtaking AUD (refer above chart).

The outperformance of GBP has affected its ranking as well and it is now the second cheapest currency on a cross sectional basis (last month, GBP was the cheapest G10 currency). EUR continues to be modestly rich relative to fair value, but notably the residual continues to be near the low-end of its range ahead of the French elections (refer above chart).

There is scope for more concession for political risk in European currencies. EUR still screens just above fair value on this framework, indicating that there is room for further weakening if political risks intensify heading into the French elections. The richness in EUR continues to be similar to that in CHF on this framework, a gap we think should widen in favor of CHF. The political concession in GBP has declined and there continues to be scope for more weakening relative to longer term history.