Deutsche Bank's co-head of FX research, George Saravelos, spoke to Bloomberg earlier this morning
- Pound isn't cheap if you consider the level of stress a hard Brexit would entail
- Have to look at valuation in terms of EUR/GBP - the key cross for the pound
- EUR/GBP is around fair value close to 0.90 in terms of purchasing power parity
- For the pound to be "cheap", it needs EUR/GBP to climb towards 1.00
- Thinks that the pound should price in more hard Brexit risks
- The firm views that odds of a hard Brexit are 50%
- For the pound to factor those odds, EUR/GBP would have to be closer to 0.95
It's an interesting view and it is one that feeds into the market consensus towards the pound over the past few weeks, which intensified after Boris Johnson took premiership.
The spectre of Brexit is something the pound isn't likely to escape any time soon but as we embrace the parliamentary recess until 3 September, stretched positioning could lead to some vulnerabilities in price action like what we're seeing in the session today.
The pound may still be sitting lower but it's been a solid climb higher from the lows after having seen cable hit 1.2119 before holding near 1.2190 currently.
There's still a long way to go before justifying any good news for the pound but as shorts get overcrowded, it makes an already obvious - and stretched - bet less attractive.
I reckon that could be the story of August trading in the pound before traders ultimately focus back on no-deal Brexit risks once September hits (thus, the selling will eventually continue) as lawmakers kick start the whole Brexit drama once again.
