GBP: Performance under pressure – Nomura

It’s been a relatively quiet week for event risks across the G10 including the UK and GBP has broadly traded lower so far and has been the fourth worst performer since the BoE’s inflation report disappointment last week, notes the analysis team at Nomura.

Key Quotes

“EUR/GBP has drifted slightly lower though, as the market’s EUR-phoria has lost some of its shine after a good JOLTs report reminded the market that the Fed may just deliver on its warnings of balance sheet reduction and more hikes to come. That itself would be a surprise vs market pricing, which still assigns only a 40% probability to another rate hike by year-end in the US (and 27% for the UK). There was a time just a few weeks ago when investors were looking to “buy EUR on a dip” – is this not it? We think the market price action this week is representative of lowliquidity summer trading and does not represent a regime change.” 

“Given the event risk of this week is Friday’s US CPI number, to avoid the volatility around this release GBP may be used more as a funder for long EUR trades rather than USD. In the vol space the spread between EURGBP and EURUSD skew has narrowed to its post-financial-crisis lows and EURGBP implied vols have fallen below EURUSD. This means the relative value between choosing GBP or USD as a funder for long EUR is more balanced than we’ve seen in the post-Brexit era. Therefore, we judge the riskreward in the short term is to enter long EUR/GBP here at 0.9025 and enter a 31 October 0.92/0.94 call spread for 0.51% EUR premium with a maximum payout of 4.2 to 1.”


Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.