Idea of the Day: Getting bearish on the pound

The outlook for the pound seems to be dimming again. Firstly, GBP has failed to stage a decent recovery on Monday even though the post-NFP dollar rally has faded and the buck is struggling.

What: The outlook for the pound seems to be dimming again. Firstly, GBP has failed to stage a decent recovery on Monday even though the post-NFP dollar rally has faded and the buck is struggling. Added to that, political woes are once more building. Some analysts are starting to worry that October’s Conservative Party conference could hold some sterling-negative surprises including a leadership challenge and more confusion on the government’s Brexit negotiating stance.

From a technical perspective, although GBP/USD managed to stay above key $1.30 support after Friday’s sell off, the recovery has been tepid and last week’s highs around 1.3445 seem like a long way off. The other thing that made us wary of a move to 1.35 and beyond in cable was the relatively narrow “rally”, with GBP/USD doing well, but the broader sterling index remaining close to its lowest levels since January. Unless sterling rallies across a broader range of currencies, then even if the dollar continues to weaken, upside in cable could be limited.

How: We would recommend waiting for a half-hearted GBP/USD rally before looking for this pair to fall further, at least in the short term. A move back to 1.3130-50, Friday’s highs, could trigger another sell-off. US CPI on Friday could also knock sterling off course if US price pressures show signs of building. Obviously some of the UK focused political risks could take a few months to materialise, but the Autumn could be a weak few months for sterling, and with event risk on the horizon it could limit interest in the pound in the coming weeks.

Another way to express a weak pound view is to look at the FTSE 100. The UK index has a negative correlation with the pound, as you can see in the chart below. So, when the pound tumbles this can be good news for UK blue chips.

Chart 1: 

Source: City Index and Bloomberg 

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