Shorting GBP/USD Sub-1.4000: 'The Widow Maker' - Credit Agricole

The latest results from our positioning indicator -G10 FX PIX suggests that investors are running excessive shorts already. We remain cautious and think that uncertainty about Brexit as well as growing bets on potential policy action by the BoE (markets are attaching a more than 60% chance to a rate cut before yearend) should continue to could drive the outlook for GBP.

All that said, we cannot help but notice some signs that the recent selloff in GBP is starting to look overdone and may pause in the very near term.

To start with, the GBP TWI is down more than 8% from the December 2015 highs when Brexit fears started escalating in earnest. If you think, as we do, that a balance-of-payment crisis on the back of a potential Brexit should push GBP down by 15%, the latest price action would suggest that investors are attaching more than 50% chance to Brexit, This is in contrast with the recent polls that are still showing some support for the ‘Stay in’ camp or the odds that the Bookmakers are attaching to Brexit at present.

In addition, we also note that past GBP/USD-forays in the sub 1.4000-territory were rarely sustained. Indeed, a look at the FX market price action over the last 30 or so years would reveal that while the currency pair tested the lows in 2000, 2001 and 2008, these did not result in a sustained downtrend. The one important exception was 1984-1985 when GBP/USD drilled all the way down to 1.0520 before rebounding in the wake of the Plaza accord to cheapen the USD TWI. Needless to say, at present there are not many people who expect a USD-rally and GBP-selloff of similar magnitude.

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