The British pound has been on a tear lately and part of the reason is due to the signs of recovery in the housing market. The following chart illustrates the close correlation between the trade-weighted value of the GBP (white line) and the HBOS house price index (red line).
The sharp increase in the HBOS suggests that we could see further gains in the GBP/USD.
Source: Bloomberg
The improvement has been so significant that many analysts are stressing the undervaluation of the British pound. According to a report by Citigroup, the British pound is one of the most undervalued major currencies. Some analysts are even calling for a 20% rally in the pair.
The more optimistic outlook is supported by recent improvements in the service and manufacturing PMI surveys.
Unlike other major currencies, the British pound could see sharper gains as long positions in the currency pair remain limited. According to the latest Commitment of Traders (COT) report, net short positions increased for the British pound, which indicates that traders are not long.
By Kathy Lien, Director of Currency Research at GFTForex.com
