Risky assets are trading firmer across the board leading to some stabilisation in GBPUSD and EURUSD. However, we remain of the view that both pairs are likely to trade lower in the near-term to 1.30 and 1.09 respectively.
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EUR shorts are sharply lagging behind GBP. We expect market participants to continue to build EUR short positions in anticipation that political contagion from the UK developments. Our BNP Paribas positioning framework suggests market positioning was only slightly short EUR last week, suggesting scope for the EUR to lose ground as short positions are built up.
Working against this is the underlying structural support for the currency stemming from the fairly large current account surplus, but on balance we think near-term risks are to the EURUSD downside and we see scope for the pair to test through 1.09. We target GBPUSD to reach 1.30 in the near-term.