Yesterday, The USD retreated sharply after making new recent highs. There was not clear catalyst for the reversal, but we have been observing that USD long positioning has built up rather quickly, that Fed rate hike pricing was getting rather high given lingering uncertainties, and that the USD was looking rich to our short-term fair value model.
Carney comments a reminder of stretched GBP levels GBPUSD slide to its lowest levels since the day of the referendum yesterday after the UK Chancellor warned that political considerations in Europe could force a tough deal with the UK. However, the pair subsequently rebounded, recovering back to just shy of 1.22. A broader pullback in the USD was the main driver of the reversal, but the GBP also benefitted from BOE Governor Carney’s comments that there are limits to the MPC’s willingness to look through a GBP-driven overshoot in CPI.
Carney has said before that the GBP is an important input into policy decisions, but the remarks are another reminder that the GBP is now trading at levels where policy changes and investor behaviour may begin to lean in a stronger direction for the currency. We recommended a six month call GBPUSD call spread last week, looking for a long-term recovery from what we view as very cheap levels. We also see scope for a GBP shorter-term squeeze higher given stretched short positioning.
Copyright © 2016 BNP Paribas™, eFXnews™Original Article
