FXStreet (Delhi) – Research Team at Nomura, suggests that the current levels make a tactical short EUR/GBP position attractive, coupled with the ECB reminding us that it can still act, which will likely provide a catalyst for a correction lower.
Key Quotes
“The year 2016 has seen GBP fall to fresh lows driven primarily by three forces: (1) the ensuing risk-off environment with GBP trading in line with risk proxies as of late; (2) the further delay of BoE hiking expectations (to the point where “liftoff” pricing is close to non-existent); and (3) the pre-emptive hedging that has taken place in advance of the announcement of the EU “Brexit” referendum date.
These three drivers could continue to prove a drag, but the price action in 2016 thus far appears excessive, in our view.
The final question remains as to the possible reaction of GBP once the date for the EU Brexit referendum is announced. We expect a deal to be reached between leaders at the 18-19 February EU summit, a few days after which we could see a proposed date for the EU Brexit referendum. However, whatever proposed date is announced would not be guaranteed, as it still has to pass through a vote in the houses of Lords and Commons (where a June referendum date would likely be met with stiff resistance on either side of the aisle).
Nonetheless, the logic follows that the date announcement could see a good amount of GBP hedging flows weigh on GBP on the day. Although the BoE is unlikely to turn hawkish anytime soon, the market currently prices a small chance of a rate cut, underscoring our belief that current market pricing is excessive.
After the October 2015 ECB meeting, EUR/GBP depreciated immediately and continued for the next few weeks, from around 0.72 to 0.70, which was nearly 3% on what was a relatively short timeframe. We would therefore be unsurprised to see EUR/GBP declines to 0.75 or even below fairly quickly.”
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