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GBP/USD Weakness Only a Matter of Time: Strategies from Scotiabank, Westpac, BNP Paribas, Morgan Stanley, Lloyds

Institutional currency strategists update us on how where they see the opportunities and risks in trading the GBP/USD pair.

Trader exchange rates

  • GBP/USD at 1.2976 at time of writing
  • Westpac eyes decline downt to 1.28
  • Target GBP/USD reaching 1.24 - BNP Paribas
  • Decline through the 2009 lows at 1.35 is viewed as the last phase in the bear trend - Lloyds

The GBP/USD appears intent to cling onto the 1.30 marker for as long as possible, with its ability to do so apparently dependent on the Bank of England’s success or otherwise at buying government gilts on the bond markets.

A recent break below the late July support zone at 1.3060, "now means that there is a 40 pop band of resistance at 1.3060/1.31 which is being eyed as a near-term sell zone now," notes Richard Perry at Hantec Markets.

Indeed, for FX strategists at the world’s leading institutions the outlook remains clear - more downside in GBP is to be expected.

There are however differences in how the various strategists see this outcome playing out.

“The BoE’s aggressive easing package should continue to reverberate on the pound. Gilt purchases recommenced this week – albeit with some hiccups – but other measures will only be rolled out in the weeks ahead,” says Westpac’s Martina Song.

“Moreover, the MPC has indicated it is ready to cut the bank rate yet further, so easing talk will remain at the fore. The only real brakes on GBP/USD as it eyes 1.28 is the overhang of spec positioning (CME leveraged funds already short -66.6k contracts last week) and of course a reluctance to load up on USD,” says Song.

Westpac hold a recommendation of being short GBP/USD from 1.3057, stop 1.3210.  

BNP Paribas also maintain a Bearish GBP/USD stance, as per a strategy piece provided to us by eFXNews, the institutional research distribution service.  

The investment bank’s strategists cite BoE MPC member, Ian McCafferty’s Op-Ed for the Times in which he says should the UK economy perform in line with the initial survey signals, more easing would likely be required.

McCafferty is viewed as the most hawkish member on the MPC, who voted for a rate hike back in January, and his comments will support already very dovish BoE pricing.

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“We remain broadly bearish on the GBP and target GBPUSD reaching 1.24 in the near-term,” say BNP Paribas. “Our STEER model also initiated a short GBPUSD recommendation in addition to a pre-existing long EURGBP trade, because FX markets have not responded as much as relative rates markets to the August BoE meeting and July payrolls.”

Morgan Stanley are also looking for further GBP weakness.

“There are two themes currently occupying the markets. Within the low-yielding FX world it is the real yield differential theme, and elsewhere it is the carry theme. The combination of these two themes should keep USD generally offered. It is only GBP that does not fit into this framework, running its own bearish agenda,” say Morgan Stanley.

The investment bank maintains a short GBP/USD position and a long EUR/GBP position in its strategic portfolio.

Scotiabank: GBP Rallies to be Sold

Technical signals suggest that GBPUSD weakness is a question of time only, argues Shaun Osborne, Chief FX Strategist with Scotiabank Global Banking and Markets in Toronto, Canada. 

According to Osborne, "GBPUSD’s break under the base of the July triangular consolidation targets an immediate move to 1.26 in the next 2-4 weeks."

"Still lower levels remain technically possible, if not likely, given the alignment of strong, bearish trend strength signals across a range of short, medium and longer-term timeframes which underscore the power of the underlying move lower in GBPUSD from a technical perspective."

Fundamentally and technically, Scotiabank think minor GBPUSD rebounds near-term represent good selling opportunities.

Lloyds: 1.35 is Last Phase of Bear Trend

At the time of writing we note GBP/USD has bounced from important support in the 1.2950/40 region, ahead of the 1.2798 lows set on the 6th July.

According to Lloyds Bank, intra-day studies are still unwinding from oversold, but a move through 1.3125/35 is needed to suggest this will be a price correction towards channel resistance around 1.33.

"While under this interim resistance we may merely consolidate sideways. A decline through 1.2950/40 would open the previous lows with little support below there till the 1.25 region," say Lloyds.   

Long-term, Lloyds argue the decline through the 2009 lows at 1.35 is viewed as the last phase in the bear trend that started back in 2007 from the 2.1160 highs.

"We favour a multi-month bottoming process. What isn’t clear yet is whether the current rebound from the 1.2800 region is the start of this process. A decline through there sees next major support in the 1.22-1.18 region," say Lloyds in a note to clients.