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.
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%).
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.