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21 Apr 2015
GBP/USD shorts preferred, target 1.44 - ING
FXStreet (Barcelona) - GBP/USD has seen plenty of UK election risk priced in, but a short position remains the preferred trade for the pair, notes Petr Krpata, Foreign Exchange Strategist at ING, with the bearish target being 1.44 levels.
Key Quotes
“GBP started feeling the heat of the upcoming election uncertainty. Since the beginning of April, we have observed many occasions when GBP failed to react to positive data surprises. Based on our estimates, around 3% worth of risk premia has been consistently reflected in GBP/USD over the past 3 weeks. This should not come as a surprise in the context of the collapse in US yields in recent weeks which would, under normal circumstances, warrant higher GBP/USD.”
“The estimate of UK election-related risk premia is less clear for the EUR/GBP cross given the Grexit concerns weighing on EUR crosses more than offset the UK election uncertainty. This has particularly been that case over the past few days when Greek bond yields spiked sharply. Yet, we believe it is fair to say that in the absence of the upcoming UK elections, EUR/GBP would be trading even lower.”
“With risk premia heavily reflected in GBP crosses and GBP implied volatilities elevated, being short GBP ahead of the election either via spot or option market is no longer the most attractive trade. Rather, we see opportunities in the post-election world, particularly if we see a knee-jerk reaction in GBP higher (once the market discounts the uncertainty about the election results and potentially overreacts).”
“As per above, we don’t think a material reduction in GBP risk premia will be warranted and rather expect the risk premia to remain persistently priced into GBP. Hence, GBP rallies should be faded.”
“Our preferred way is short GBP/USD, given our view that USD softness will be temporary and USD starts gaining ground in summer once better US data bring back expectations of Fed rate hikes. We target the GBP/USD 1.44 level.”
Key Quotes
“GBP started feeling the heat of the upcoming election uncertainty. Since the beginning of April, we have observed many occasions when GBP failed to react to positive data surprises. Based on our estimates, around 3% worth of risk premia has been consistently reflected in GBP/USD over the past 3 weeks. This should not come as a surprise in the context of the collapse in US yields in recent weeks which would, under normal circumstances, warrant higher GBP/USD.”
“The estimate of UK election-related risk premia is less clear for the EUR/GBP cross given the Grexit concerns weighing on EUR crosses more than offset the UK election uncertainty. This has particularly been that case over the past few days when Greek bond yields spiked sharply. Yet, we believe it is fair to say that in the absence of the upcoming UK elections, EUR/GBP would be trading even lower.”
“With risk premia heavily reflected in GBP crosses and GBP implied volatilities elevated, being short GBP ahead of the election either via spot or option market is no longer the most attractive trade. Rather, we see opportunities in the post-election world, particularly if we see a knee-jerk reaction in GBP higher (once the market discounts the uncertainty about the election results and potentially overreacts).”
“As per above, we don’t think a material reduction in GBP risk premia will be warranted and rather expect the risk premia to remain persistently priced into GBP. Hence, GBP rallies should be faded.”
“Our preferred way is short GBP/USD, given our view that USD softness will be temporary and USD starts gaining ground in summer once better US data bring back expectations of Fed rate hikes. We target the GBP/USD 1.44 level.”