The British pound had a “Super Thursday” with everything going in its direction. However, it may not stay this way. Here is the view from the team at Citi:
Here is their view, courtesy of eFXnews:
We argued before that the current account only balances when yield differentials or import volumes fall (i.e. UK growth slows). Otherwise, to see GBP rally, financial inflows need to be incentivized with higher expected returns and lower expected volatility (higher rates, low FX, rates and policy uncertainty).
We don’t see such flows as yet forthcoming and expect GBP to remain heavy. We are consoled by lighter positioning and expect those already short will be comfortable holding. Anecdotal evidence suggests most haven’t shifted their view on the next few months and instead see a grind back lower.
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Lightning struck thrice on the UK court case, BoE and better PMI print. GBP is left 1.2-1.4% higher vs. EUR and GBP – not outsized given new information. Though the BoE may have put an initial floor on real rates, we don’t see a sustained GBP rally and expect investors will use current levels to reinitiate downside.
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