Hello and welcome to CantosCharts. My name is Simon Derrick and I'm Chief Currency Strategist at BNY Mellon.

When I was here five months ago in late October of 2009 we were talking about sterling and one of the opinions I suggested at the time was that sterling was long-term very undervalued and that given the fact that selling had a history of mean reversing, there was a good chance that at some point selling would start to come back.

We didn't know the timing of that then. Clearly, five months on, we have yet to make that move. But there are signs that we're getting closer and closer to that point where sterling is finally going to start moving back to what we would consider to be fair value against a range of currencies.

The chart we're going to start with today is the Sterling Index. This is going back all the way through until the late 1970s.

One of the points I think that comes over very clearly indeed is that throughout most of that period sterling has traded in a very clear and very well defined range. And that moreover, over the course of the last two, two and a half years, sterling has essentially moved from the top of that range to the bottom of that range. Then we've seen a brief bounce going over the course of the last six to nine months, and at the moment we're having a brief move back towards the bottom of that range.

But, the key words there are the bottom of the range. I think if we were to look at the average price over that 30-odd years of the Sterling Index, it's currently something like 100 whereas at the moment we're trading well below 80. Remember, currencies, on any reasonable valuation, is at least 23, 25 per cent underneath where we would normally expect it to be trading. And on that basis alone, while it's perfectly possible that sterling could make that one final leg down, presumably something to do with the general election coming up over the next two or three months, I think that on any long-term basis, it seems this is a point where investors should really be considering buying rather than selling.

This is a point that's rather well made also by our euro/sterling chart. Certainly sterling has been stuck in a narrowing range over the course of the last 12 months.

But one of the things that really stands out is if we look at our momentum indicator (a 14 week RSI in this case), it is very clear that a lot of the upward momentum that has been in the trend for the last two, two and a half years is really starting to seep away.

It's also apparent to us that again if we look at the long run average for euro/sterling that again we're significantly far away. It's round about 70p. So again, we have a 25 per cent, 28 per cent over-valuation of the euro against sterling at present.

There are other reasons also to believe that this could actually be a fairly significant pull back for sterling. One of the things that we spend a reasonable amount of time looking at is the weighting of investors. In particular, we look at the weighting of reserve managers. Currently, about 31 per cent of the reserves of emerging market nations are held in euros, whereas only about 5, 5.5 per cent is held in sterling. So it's difficult to believe that the market is particularly overweight sterling at this point.

There are also one or two other things, on a fundamental basis, that are worth highlighting. In particular, there's a lot of emphasis in recent weeks about the outcome of the election and, clearly, a lot of the pollsters are looking at the idea that it could be a hung parliament.

For those looking elsewhere for their information, some of the betting websites they're actually suggesting that the election could be a clear outcome for the Conservatives. On this basis again, it seems to us that actually that those are strong reasons to look for sterling to make a fairly sharp snap back from here.

Talking of euros, we'll be looking at the euro tomorrow when we look at our charts.