Back to EURGBP


TECHNICALS - So one of those plays I love out there as a play to sit back on for many many months to come, is a short EURGBP play. There are so many attractive things about this position and I would really like to be getting involved. The first reason has to do with the levels we're into now. The cross rate has easily broken out to a 2018 high and is trading at its highest levels since September 2017. It's also now retraced more than 61.8% of the move from the Brexit high down to the post Brexit low, leaving it looking quite extended. I wouldn't rule out the possibility for added upside towards the 78.6% fib into the 0.9150 area, but I don't think we will be fully retracing the move to get back to where we were just after the Brexit vote in 2016. The daily chart is also now technically stretched and I suspect we should see a reversal to the downside very soon.

cartoon aug 29

FUNDAMENTALS - On the fundamental side, I recognize things have been tough with the outlook for the UK right now and how everything will play out. There has been a surge in sentiment that now sees the no-deal possibility playing out and the Pound has suffered a lot because of this in recent months. But ultimately, I think all of this will sort itself out and a resolution will be reached that removes a lot of the uncertainty around this risk and in turn, opens a major wave of demand back into the Pound. Brexit aside, the UK economy has been recovering nicely these past several years and if we can get past this issue, yield differentials will all of a sudden start looking a lot more attractive for the Pound.

It may not look it at the moment, but there is a lot to be said for playing $EURGBP to the short side.

CARRY ON - This brings me to my final point and perhaps the one that is most compelling about this play. To be short EURGBP is to be getting paid the positive carry from the trade. So every day this position is held, no matter what happens, you are getting paid on the yield, which is a pretty good deal. Remember, the ECB has said it isn't even going to consider moving on rates for a year. So if in the weeks ahead we get more clarity on Brexit and we're all of a sudden talking more BOE hikes, this positive carry will only become that much more attractive and EURGBP will be headed a lot lower than where we are right now. A lot!


Subtle But Important Changes

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