How Low Could Pound Sterling Go?

With the pound at an all-time low against the US dollar, it can become immediately tempting to think sterling is grossly undervalued

Dan Kemp 26 October, 2016 | 4:20PM
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Currency shifts are playing an ever more important role in investors’ portfolios – meaning there is increasing pressure on those making asset allocation decisions to consider the long-term drivers of a particular currency. While currency is notoriously difficult to assess with any precision, the Morningstar Investment Management team employ certain techniques that help us avoid the noise and focus on any material long-term implications of our currency convictions.

Is it Possible to Value Currency?

With the pound at an all-time low against the US dollar, it can become immediately tempting to think sterling is grossly undervalued. We take a far more pragmatic approach, using the conceptual theory of the Big Mac index, where the cost of a McDonald’s Big Mac burger in various countries could be a better signal to areas of over or under valuation, and assess a broad definition of ‘fair value’ to determine the likely long-term direction of a currency.

Sterling is getting cheaper against the dollar

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA