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GBP: Calibrating The Current GBP Decline; What’s Next? –

The pound  remains under pressure after the big flash crash. The team at Bank of America Merrill Lunch analyzes the next moves for the pounded pound:

Here is their view, courtesy of eFXnews:

The initial sell-off in GBP/USD following the EU Referendum was immediate and resembled the price action in 1992 when the pound was ejected from the Exchange Rate Mechanism (ERM). If that pace of depreciation had been sustained, GBP/USD would have been comfortably trading below 1.20 by now. However, the improvement in UK data (relative to analysts’ overly bearish expectations) has seen GBP/USD stabilize with its current trajectory more reminiscent of the price action during the financial crisis in 2008.

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gbp-boe-bank-of-america-october-2016

Relative to previous idiosyncratic crises, the current fall in GBP appears to be in its infancy  in terms of the number of days from peak-to-trough moves in the pound: 18% of the way through relative to 1975; 63% versus 1992 and 33% versus 2008. A two-year timeline for negotiations once A50 has been triggered will keep GBP under pressure and risks further new multi-year lows. This view is supported by the analysis of previous peak-to-trough moves in GBP/USD through various UK idiosyncratic crises.

On average, GBP/USD has fallen by 30% through those previous episodes. GBP/USD has already fallen by 14% since the Referendum.

Should GBP/USD decline at a similar average monthly pace as it has done since July (-1.3%) until end-2017 and in line with previous peak-to-trough declines, GBP/USD could target 1.05.

This projection would coincide with the 1985 low in GBP/USD ahead of the Plaza Agreement.  We must emphasize that this does constitute an official forecast but a projection  based on previous idiosyncratic moves in sterling. We had previously forecasted a low in GBP/USD of 1.25 in 2017, but highlighted that the risks were to the downside and the low could be hit sooner rather than later.

At present, and despite the large short, there appears to be little respite for the pound. In cash, we prefer to be seller of sterling rallies but our preferred strategy is to be long GBP volatility.

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.