GBP remains vulnerable, potential rebound in GBP/USD? – BTMU

Derek Halpenny, European Head of GMR at BTMU, suggested a rebound in Cable should not be ruled out for the time being.

Key Quotes

“Pound selling persisted yesterday underlining the fact that market participants refuse to acknowledge any positive developments for the pound and continue to focus on the prospect of a ‘hard’ Brexit – whatever that means!”.

“But the fears of ‘hard’ Brexit persist which continues to encourage pound selling on any bounce. But how long can that last? Given the positioning in the market with IMM data showing both leveraged and real money accounts heavily short the pound, we see increasing risks of a squeeze higher as excessive positioning adjusts. From a yield perspective the pound is on more solid ground as well. Fears of problems financing the current account deficit should recede given the sharp move higher in yields with the spread over German bunds moving over 40bps in favour of the UK over the last two months”.

“What might be holding back a recovery of the pound is the strength of the dollar. 60- day rolling daily correlations show that the EUR/USD correlation with GBP/USD has reasserted itself (0.80) and hence a period of dollar weakness could prove a catalyst for a rebound in GBP/USD – given the extreme positioning and sentiment we would expect any correction to out-perform a move higher in EUR/USD, thus resulting in pound strength versus the euro as well”.