Goldman Sachs on what’s next for the pound
Our starting point was that standard valuation models – such as our own GSDEER – are not well suited to address this question. This is because these models, which essentially amount to slow moving averages of the exchange rate (controlling for terms of trade shocks and productivity differentials), do not adjust for the kind of structural break that the referendum and potential for a "hard"Brexit surely represent. Indeed, Exhibit 1 shows our own GSDEER fair value (black line) with two standard deviation error bands (grey area). It shows that GBP/$ is slightly more than one standard deviation cheap at this point, given that Cable has plunged while GSDEER fair value is essentially unchanged. The signal that Sterling is cheap therefore ignores the ructions that Brexit may cause for the UK economy and – potentially – a drop in fair value.
