“GBP has been rebounding from this year’s Brexit-driven lows. This is mainly due to the recent better-than-expected macroeconmic data, suggesting less scope for the BoE to consider a more aggressive monetary policy stance anytime soon. However, with uncertainty regarding Brexit negotiations remaining high, it may be early days to suggest an ‘all clear’. Indeed, BoE Governor Mark Carney stressed as part of this week’s parliamentary testimony that a more aggressive policy stance could be considered if needed. If anything, long-term uncertainty suggests that the central bank will do its utmost to keep investors’ expectations of central bank monetary policy strongly capped. Assuming there is little scope of BoE rate expectations to rise from their current levels, it would be up to position squaring to make a case for more sustained currency upside beyond levels of 1.35 in majors such as GBP/USD. This is especially true should Fed monetary policy expectations start to stabilise anew.
In fact, further potential for an upward correction has been widely stressed, mainly due to IMM data suggesting that speculative short positioning remains close to multi-year highs. However, our positioning gauge implies that positioning is back to the levels it was at when the referendum was held. Considering that our data incorporates measures such as risk reversals, it may provide a more reliable indication. Elsewhere, it must be noted that our data puts a strong focus on corporate flows, which should not be disregarded in the current environment.
In conclusion, one may want to assume that the GBP pain trade has nearly run its course already, at least when relating the past few weeks’ upside to positions entered around the time of the EU referendum. Short positions entered ahead of it may have a much higher pain threshold or have been taken off already. There may be less upside correction risk left. On the contrary, with interest rates having settled at considerably lower levels, the currency may be subject to renewed downside risks later on.
As such, we believe GBP will stay subject to range-trading behaviour, at least from a broader angle”.
Copyright © 2016 Credit Agricole CIB, eFXnews™
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