GBP: Fade the rally – Standard Chartered

Analysts at Standard Chartered explains that the GBP-USD rally over the past week does not diminish their bearishness as they think that higher than expected UK CPI inflation and an incrementally less dovish Bank of England (BoE) in the context of stretched short GBP positioning have driven the move.

Key Quotes

“However, we expect these drivers to be more than offset by the negative economic fall-out from UK-EU Brexit negotiations. We recently lowered the stop on our short GBP-USD recommendation to 1.2510 (target: 1.19, entry: 1.2526). With spot currently trading close to our stop level, we would look to re-enter shorts if our recommendation were stopped out.”

“Stretched short GBP positioning driving whipsaw price action

While we remain bearish on GBP-USD, upside surprises to UK economic data or encouraging noises on the UK’s Brexit negotiations with the EU could drive an outsized and violent short squeeze. The GBP is the largest long USD position relative to open interest, according to the latest CFTC/IMM data. The broad-based USD sell-off over the past week is most pronounced against the largest dollar longs, including the GBP, EUR and JPY. But for GBP-USD, the idiosyncratic risks of Brexit negotiations suggest that short squeezes will prove to be aberrations on a downward trajectory.”