Trade Idea: Tactical Short EUR/GBP 

• We add a short EUR/GBP trade to our model portfolio. Target 0.86 (stop 0.905).
• In our recent note, ‘In the Pound We Truss’, we laid out the valuation and current account arguments for why GBP at these levels could be attractive.
• But we still think there could be further dollar strength, which would push all currencies lower, so we prefer to be bullish GBP against EUR.
• In terms of shorter-term dynamics, we think the marginal newsflow on the UK fiscal picture is unlikely to get any worse. There appears to be consensus that it was an EM-style action and the BoE has stated they won’t do an intra-meeting move. Could the news get any worse? (We don’t think so in the near-term).
• Moreover, much of the UK-specific weakness appears to exhibit flash crash dynamics. History suggests fading such moves tends to be profitable.
• Finally, looking at our short-term value/correlation models for EUR/GBP – we find the most correlated driver euro real yields suggest a lower EUR/GBP (Charts 1 and 2).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)