GBP/USD never fully recovered from the devastating flash crash but the team at Goldman Sachs sees further room to the downside:

Here is their view, courtesy of eFXnews:

Since we reiterated our 3-month target of 1.20 for GBP/$, Cable has fallen sharply to within striking distance of our forecast*.

Given how much Sterling has now fallen, much of the market dialogue revolves around the idea of “fair value”,with many making the point that the Pound is now very cheap. Indeed, on our fair value model for exchange rates, something we call GSDEER, GBP/$ is now slightly more than one standard deviation cheap, the first material undervaluation in a long time (Exhibit 1). The problem is that GSDEER and models like it tend to generate estimates for fair value that are essentially long-term moving averages of the exchange rate, which means that they do not allow for structural breaks of the kind that the referendum and the rising odds of a “hard” Brexit clearly represent. In other words, fair value in models such as GSDEER has likely jumped lower, although the extent to which this is the case is difficult (and somewhat arbitrary) to model.

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We therefore pursue a different approach, estimating the kind of exchange rate adjustment needed for the UK current account deficit to shrink to some target level. This kind of model, also called the macro-balance approach, is used by the IMF in its exchange rate valuation assessment across countries. The model generates an estimate for the underlying current account, closing the domestic and foreign output gaps and feeding through lagged effects of exchange rate changes.

Exhibit 3 shows our estimates for the underlying (cyclically adjusted) current account (blue line), together with the actual current account (black line). Exhibit 4 maps the difference in these two lines into the contributions from closing the domestic and foreign output gaps and feeding through lagged exchange rate changes.