There are three reasons to think these might be good levels to enter tactical
sterling shorts. First, the market looks to have unwound a significant amount
of, if not all, UK EU referendum risk premia according to the Bank of England’s
analysis, with 89 on the broad GBP TWI consistent with pre-referendum fair
value, yet polling remains volatile and questions remain about their accuracy.
Also, above this level, the BoE are likely to turn more dovish. Second,
positioning has significantly reduced. Today’s IMM report shows that
leveraged fund positioning is back to flat and last week’s CORAX showed large
paring of GBP shorts. Third, being short GBP would take advantage of a less
risk positive environment on renewed USD/CNH appreciation and a more
hawkish Fed. The correlation between EUR/GBP and equities has dropped to
record lows (see second chart).
Entry: 0.7630, stop 0.7490, target 0.7850