BNP: GBP to remain under pressure. We target 1.30 on GBPUSD

From the FXWW Chatroom: Regardless of how the broader risk environment evolves, we expect the GBP to remain under pressure this summer as markets question the capacity of the UK to attract investment flow sufficient to fund a large current account deficit. Overnight, S&P cut the UK’s last remaining AAA credit rating and Fitch announced downgrades of the UK to AA from AA+. Today, BOE will hold its third and final special repo operation to provide liquidity following the referendum and our economics team continues to expect further easing measures to be announced at the August MPC or earlier in possible inter-meeting move. We expect GBPUSD to reach 1.30 in the near-term.

Market likely to add to EUR shorts, potentially chasing GBP

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 will begin to weaken the currency. Our BNP Paribas positioning framework suggests market positioning was only slightly short EUR heading into the voting, suggesting scope for the EUR to lose ground as shorts are built up (see chart). 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. Today, a two-day EU leaders’ summit begins and policy makers will likely attempt to communicate reassurance. PM Cameron will attend on the first day. The ECB’s conference in Portugal continues and, while BOE Governor Carney and Fed Chair Yellen have cancelled planned appearances this week, we will hear from ECB President Draghi, and council members Cœuré and Praet will participate in panel discussions.

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