GBP: 4 Reasons Why Risk-Reward Not Attractive In Chasing GBP Lower From Here
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We do not think the short-lived but violent overnight sell-off in GBP reflects a fundamental adjustment and hence we do not expect Sterling to re-test the lows seen during Asia trading hours.
We do not think risk-reward favours chasing GBP lower from here for the following reasons.
Firstly, FX investors already hold an extreme short position in GBP as signalled by BNP Paribas FX Positioning Analysis.
Secondly, negative UK news flow should start to moderate as the EU and UK outline their starting positions for negotiation.
Thirdly, GBP is already trading extremely cheaply versus where we estimate fair value even in a ‘hard Brexit’ scenario (BNP Paribas CLEER simulates fair value at 1.35 in a situation where the UK’s broad basic balance of payments deteriorates to -10%).
Finally, the overnight sell-off likely reflects technicalities of FX option market positioning and thin Asia liquidity. Therefore, we do not think risk-reward is attractive to chase GBP spot lower from here.
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