Short EUR/GBP (Macro) Long Term
“In an environment of carry support and market calm, we think the focus has moved away from worries about Brexit effects. Prime Minister May has set outher plans to trigger article 50 in March with enough detail that it this is reflected in the price of GBP.
GBP is currently undervalued in our view and has stabilised, which we think offers a strategic opportunity to buy. In contrast, Eurozone political risks remain high as we get closer to elections. The ECB is unlikely to change its accommodative stance as inflation rates remain wide across the Eurozone. EURGBP has now broken below its 200DMA,a supportheld since mid-2015, which we think will provide more downside momentum.
In the middle of 2016, 63% of global reserve allocations were in USD,20% in EUR and only 4% in GBP. As commodity prices stay supported and the USD is no longer strengthening at its former pace, there will be room for total FX reserves to rise.
Eurozone political risk events and related EUR bond volatility may provide incentive for these reserve managers to reallocate away from the EUR.
GBP seems a good alternative as the Brexit uncertainties are baked into the price and GBP is an undervalued G10 currency. The risk to this trade is the ECB sending signals that they are less worried about inflation and could therefore taper purchases this year,” MS says as a rationale behind this call.