Sterling is undervalued ahead of the election

STERLING is undervalued against the euro. Just about every trading desk I talk to seems to think so. However, very few of them tell me they will be willing to back the pound until the general election is over. With the vote out of the way, they say, the arguments for the pound will start to gather pace and there could be a 10 per cent move or more.

It’s an idea that sits in strong contrast to the bearish sentiment that has dominated the financial press over recent weeks. However, strip out the electoral uncertainty and the picture becomes clearer and more positive.

Now lets not kid ourselves that the British economy is not in a terrible state. It is. However, lots of people that crunch the numbers in the private sector are telling me that they think the figures being put out by the Office for National Statistics are far too negative. Take a look at the survey data, I am told, and you will see a more positive and realistic view of what’s going on.

If this is true, then what we should all start to see is some significant improvement in the official figures quite soon. Indeed, last week did provide some tantalising glimpses of what could be about to happen.

Not only was the unemployment story much rosier than imagined but the government’s borrowing, while certainly still grim, was not as high as many in the City had anticipated.

Then there is the argument of purchasing power. By most measures Sterling looks to be about 10-15 per cent undervalued. The Eurozone has some big problems of its own right now that could become significantly worse this week. While the pound may still have further to fall against the dollar, the current level against the euro looks far less compelling.

The problem is the UK could actually really do with keeping the pound where it is. While the picture is not as grim as some of the official numbers would suggest, the economy is still in a shocking state and will take years to fix. Keeping the pound down could really help Britain out of this mess. Indeed, it’s the one thing that gives us a real advantage over continental Europe. Fingers crossed.

Guy Johnson co-anchors European Closing Bell weekdays on CNBC.