GBP lost considerable ground against the G10 majors most recently. The move seemed driven by a positioning squeeze in EUR/GBP and GBP/JPY that followed in the footsteps of a similar correction in EUR/USD and JPY/USD earlier this week. The sequence of events propelled GBP/USD sharply higher initially to only see it plunging more than three big figures in the last few days. GBP has long been seen as "the poor man's policy divergence trade" - an alternative to the long-USD trade that the investors resorted to whenever the USD-longs in the market started to look extreme.
We have long expressed the view that the UK's close economic ties to the Eurozone should limit the scope for divergence between the BoE and the ECB and, by implication, the scope for decoupling between GBP and EUR. While the latest bounce in the cross seems in part driven by month-end corporate hedging flow and could go into a reverse ahead of the ECB next week, the recent risk selloff and lingering global growth concerns should continue casts doubt over the BoE's ability to hike rates anytime soon.
All told, we continue to prefer short EUR/USD and long USD/JPY to short EUR/GBP and long GBP/JPY as policy divergence trades in G10 FX.
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