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Foreign Exchange

FX research roundup: The sterling bear case

Cable’s off the top this morning in light of consumer confidence numbers from Gfk still around record lows and the downward revision to Q4 GDP.

Commerzbank was one of the few to predict the GDP figure but points out it is irrelevant – the focus now is squarely on Q1 – February’s PMIs next week will be of greater interest and should confirm something of an economic recovery. However the upward scope for sterling is limited as a May rate hike is already priced in.

Simon Derrick at Bank of New York Mellon says the situation is even starker and doesn’t just see sterling’s limited upside but makes the argument this morning for a rapid shock to the GBP downside. Derrick believes that the lower 10-year yields seen over the last couple of weeks, together with a lower sterling index indicates that the view of UK plc’s prospects has darkened considerably: “A sharp move lower in GBP could prove one of the early surprises” of the year.

Even RBC, which has largely stuck to the sterling bull view, believing that rate expectations were not as overcooked as they looked, is moving this morning to a less positive view. The bank wonders if the GDP contraction has the potential to spill over to Q1 after all and recommends paying close attention to BOE deputy governor Bean’s comments later today.

The last word this week goes to BNP Paribas. These days “Oil and energy price increases work as an additional tax... reducing real disposable income and increasing funding costs via the market anticipation of higher interest rates.” BNP says that, given “the government’s aggressive fiscal consolidation package has been based on the assumption of an economic rebound”, a slowing of external and internal demand conditions is bad news indeed and that an oil-price-induced weakening of global growth “will increase the risk premium of sterling denominated assets.” The bank sees EUR/GBP remaining bid and GBP/USD topping out near 1.6300: “Strategic short positions should be considered near 1.6300 with a stop near 1.6390.”

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