Strategists at Deutsche Bank entered the first week of October looking to bet on rebound in the Pound that could take it back to a target set at 1.17. Thus far, not all has gone to plan.
Deutsche Bank suggest speculators would do well to bet on further strength in the Pound, just as contemporaries at other institutions are suggesting the opposite.
We also report today JP Morgan share the views of the likes of CIBC Capital Markets and Morgan Stanley who say the Pound's recent run higher against the Euro is due to end and reverse. Market price action suggests this to be the right call. For now at least.
At mid-week we note Deutsche Bank's trade is hanging on by a thread with the Pound-to-Euro exchange rate seen around 1.1270; sitting just above the stop-loss level set out by Deutsche Bank's strategist Robin Winkler when he structured the trade.
So does will the Pound manage to stage a rebound and justify Winkler’s conviction, or is it dead in the water?
Arguments to Sell the Euro and Pound the Pound
“A BoE hike in November is now close to fully priced, but the bar for the MPC not to hike is very high as the data momentum keeps recovering from the summer lows,” says Winkler setting out his stall.
On the political front Winkler says there has been no deterioration on Brexit expectations with PM May's Florence speech and Barnier's response seen as positive, while negotiations last week confirmed a more constructive spirit.
“Once this week's Conservative Party conference is out of the way, we expect the government to use the political space to work towards a two-year EEA-based transition deal by year-end,” says Winkler.
The Pound has fallen at the start of the new month with commentators suggesting in-fighting amongst the Conservative Party is to be blame. We disagree with this prognosis and agree with Winkler that markets are in danger of overplaying the theme that the UK government is terminally divided and believe Theresa May will come out of the Conservative’s conference with a strengthened hand.
Winkler will be hoping the market picks up on this theme and reinvigorates Sterling to keep his trade idea alive.
Concerning market positioning, Deutsche Bank note while Sterling shorts have been covered, the more constructive outlook is not yet reflected in longs.
“The Euro by contrast should be more sensitive near term to a more hawkish Fed, greater hopes for US tax reform, and political noise in Germany and Catalonia,” says Winkler.
The trade looks to short (sell) the EUR/GBP pair targeting 0.85, entry at 0.8810 and stop at 0.8895.
From a Pound-to-Euro perspective this gives us a target at 1.1760, entry at 1.1350 and stop at 1.1242.
The exchange rate has this week struck a low of 1.1255, which suggests the trade is alive, but only by a whisker.
If we look at the charts we can also note the Pound has fallen to a key support area located around the 1.1250 area which probably explains the stop-loss level chosen by Deutsche Bank which allows this region to be tested.
If a bounce is to come, it must come now.
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Pound Avoids Potential Political Pitfall
The Conservaitve Party conference has passed without incident for Sterling and the Prime Minister appears to be secure in her position at the helm of Government.
Going into the event currency market commentators expressed concern that Theresa May's apparent weakened position left the door open to a potential leadership challenge which could then in turn lead to another General Election.
We argued there was too much pessimism on the matter and that the Pound might rally once markets agreed with the view that the Government has the ability to endure.
Indeed, unity was the order of the day. Granted, the conference was not a pretty one but the key message is that there is little appetite to dispose of May within the ruling party.
And importantly on Brexit there were no new surprises.
"Overall, the absence of new news in the closing speech may provide a more stable political backdrop. It now looks more likely that Theresa May remains as prime minister in the medium term. Together with a more constructive stance presented at the Florence speech, we believe this removes some of the tail scenarios going into the 5th round of EU-UK negotiations next week," says Sreekala Kochugovindan at Barclays in London.