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GBP/JPY Likely Overvalued As Markets Appear Overly Sanguine In Light Of Brexit Risks
GBP/JPY has recovered this year, after GBP weakened substantially following the emergence of COVID-19. Yet this year, as was the case in 2014, falling oil prices and other changes are likely to benefit Japan's terms of trade more than the U.K.'s position. Meanwhile, the U.K. short-term interest rate has fallen to just +0.10%, while Japan's negative rate of -0.10% remains unchanged. Purchasing power parity models suggest that GBP is either overvalued relative to JPY, or is probably at (or close to) fair value. This would suggest that in spite of both Japan's probably stronger trade position and incoming Brexit risks ... (full story)