Short GBP from a near-term tactical standpoint and on a longer, more structural horizon – Goldman Sachs

Michael Cahill, Research Analyst at Goldman Sachs, suggests that as the dust settles after a flurry of important G10 data releases and central bank meetings, short Sterling remains one of their favorite views which is true both from a near-term tactical standpoint (where they target 0.90 on EUR/GBP in 3 months, from 0.87 currently) as well as on a longer, more structural horizon.

Key Quotes

“While the BoE meeting last week took a more hawkish tone, our short Sterling view has never been about monetary policy. We think the imminent activation of Article 50 will trigger difficult trade negotiations, which is not properly priced into the currency. Moreover, while global growth and positive data surprises have been picking up, as shown by our CAI and MAP indexes, data in the UK have gone the other way. Sterling therefore offers perhaps the best divergence trade in the G10, particularly in this otherwise quiet period.”

“Looking at this week’s CFTC Commitment of Traders report, we are not alone in this view. The data show GBP net shorts reached a new all-time high, exceeding $8 billion for the first time since the data began in 1999. FX markets are always preoccupied with positioning, so the natural question is whether short Sterling is simply too consensus to be profitable.”

“It is of course true that the build-up in speculative shorts raises the potential for a violent short squeeze. However, in the quiet data period ahead, that seems like less of a risk than normal, in no small part because Brexit-related uncertainty is unlikely to decline significantly anytime soon.”