From the Société Générale Cross Asset Research team’s ‘Forex Weekly‘.
Major FX themes:
- The dovish Fed, coupled with growth supportive monetary policies globally, will continue to restrain volatility across global markets through the summer
- Sterling will do well, as the BoE shifts away from the low rates-for-longer message, but plenty of good news is already in the price, so the pace of appreciation should moderate and differentiate
- The UK’s large current account deficit is not an imminent threat to GBP strength, though a long -term concern
- Sell EUR/GBP on rallies
More on GBP:
- Correlation trade: The fading sterling factor. With the BoE early exit theme now well priced in, the GBP factor is set to fade, allowing downside in both EUR/GBP and GBP/USD. Cable is threatened by heavy long positioning and EUR/GBP is skewed to the downside as the ECB is pressured to deliver more easing. The correlation between EUR/GBP and GBP/USD has been strongly negative until now: expect it to retreat.
- Says there is ‘sizeable long sterling positioning’ in the market:
On EUR/GBP:
- Breached below a multi-year trend line support
- Is poised to test 0.7754/0.77
- Short-term pullbacks should be capped at 0.8069/85
On the Dollar Index:
- bounced after bottoming out in May at 79/78.60
- should find support at 79.70/79.40
