The pound continues trading at high ground, still rising and looking at.30 on GBP/USD. Is it too strong? Here are three views:
Here is their view, courtesy of eFXnews:
GBP: Temporary ‘Snap’ Higher Looks Overdone; Where To Target? – CIBC
CIBC FX Strategy Research notes that going into the snap UK general election on May 8th, investors are assuming that the Conservatives, under PM May, will win a larger majority which will limit the power of hardcore Brexiteers within the party and as such, the result would be a “softer” Brexit, with a more transitional deal come 2019.
However, CIBC argues that being able to ensure a transitional deal isn’t the same as avoiding a “hard Brexit”, and because of this, the recent run-up in sterling looks overdone.
“The reality that Britain won’t seek or receive a “soft” deal could come fairly soon. The Conservative manifesto, set to be published on May 8th, will most likely include references to exiting the single market and customs union while adding in the primacy of immigration control. As such the PM would effectively be locking her party into backing either a hard Brexit or no deal at all,” CIBC argues.
Such a backdrop, according to CIBC, added to signs that economic growth is finally starting to slow and interest rates won’t be rising anytime soon, should see GBP retrace some of its recent gains.
“We have a 3-month target for GBPUSD of 1.26, with sterling expected to depreciate against the euro and CAD as well over that period,” CIBC projects.
GBP/USD is trading circa 1.2950 as of writing.
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GBP: Consensus Turns ‘Too Positive’ On Brexit: What’s The Trade? – BofAML
Bank of America Merrill Lynch FX Strategy Research argues that as the consensus has become too positive on Brexit, GBP traders should consider how to position as the positive outcome is already priced in.
“We have been optimistic that the UK and the EU will agree to a Brexit transition and eventually to a reasonable new trade arrangement. However, getting there is not going to be smooth and the negotiations are likely to have a very difficult and slow start, BofAML argues.
“We remain optimistic about the final outcome and will buy the GBP dip, but we do see a dip ahead,” BofAML recommends.
GBP: Valuation, & Positioning To Offset GBP Risk Premium Into May-8 Elections – Danske
Danske Bank FX Strategy Research argues that the case for GBP weakness driven by May 8th election risk premium is not strong based on 2 factors:
First, Danske notes that this general election is very much about Brexit and as a large Brexit risk premium is already priced in the GBP and the GBP is already undervalued according to Danske’s medium-term valuation models.
Second, Danske notes that according to the IMM data, investors are very short GBP following the EU referendum last year.
As such, Danske thinks that GBP short-covering driven by heightened uncertainty should at least mitigate a GBP risk premium ahead of Election Day.
“Hence, we do not expect GBP to suffer going into the election due to an increase in risk premium,” Danske concludes.
GBP/USD is trading circa 1.2950 as of writing.
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