Pound-Euro Going Higher Short-term says Investment Bank's Winning FX Model

Pound to euro strategy

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Strategists at French bank Crédit Agricole are buying the British Pound against the Euro in the near term, finding the Eurozone's single currency has reached a short-term overvaluation.

"EUR/GBP's short-term fair value has moved lower from 0.8749 to 0.8609. The jump in the EUR last week on the back of market talk of a potential ceasefire in Ukraine over the winter led to EUR/GBP becoming more than 1.5 standard deviations overvalued," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

As a result of this deviation, Crédit Agricole's custom 'FAST FX model' has triggered a 'short' EUR/GBP trade. (To short an asset is to sell it).

The model seeks a short-term retracement in the Euro-Pound to 0.8609, which mirrors a move in the Pound to Euro exchange rate to ~1.1616.

The 12-month rolling profit on the FAST FX model sits at 13.66%, with a hit ratio (per trade) of 61%.

Crédit Agricole's short-term bet on the Pound to advance against the Euro comes as fellow French bank BNP Paribas takes the other side of the trade, albeit with a longer timeframe.

In a weekly strategy update, BNP Paribas looks for weakness in the Pound in response to Thursday's Autumn Budget.

"We estimate that the government will announce ~GBP 20bn of spending cuts/tax hikes, with some media reports citing figures 3x that large. Despite this, we think that government borrowing will still need to increase," says Parisha Saimbi, G10 FX Strategist at BNP Paribas.

He adds, "a material growth slowdown and deeply negative real rates are the worst combinations for a country heavily reliant on foreign funding."

The time could meanwhile be right to reopen fresh bets against the Pound, given the rally by the UK currency in October rebalanced positioning away from a stretched 'long' position,

"We think it opens renewed downside in the pound, especially on the crosses," says Saimbi.

BNP Paribas is forecasting the EUR/GBP exchange rate rises to 0.95 by year-end, giving a decline in the GBP/EUR rate to 1.0526.

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