GBP – Toppy?
Sterling has been a strong currency in the past 6 months. Since its April local lows of $1.27, the pound has rallied to $1.34 (+8.9%, see fig 1). The current level is its highest against the USD in more than two and a half years. On a trade weighted basis, sterling is at its highest since 2016. That, therefore, raises the question: What’s driving it?
In the long term, GBP appears to be underpinned by an emerging shift in global asset allocation. That is, capital has started to flow out of expensive large-cap U.S. stocks (especially mega cap tech) and into undervalued (and more cyclical) regions like the UK and Europe. As that occurs, GBP will benefit from those flows. GBP is also a cheap currency (measured against its PPP value).
In the near term, though, the currency looks susceptible to the risk that markets will price more cuts into the UK rates curve (relative to the US – given how much is already priced into the US curve). If so, that would likely put near term downward pressure on GBP. Additionally, from a market positioning, sentiment, and models perspective, the pound is overextended (in the near term). Sentiment and market timing models are flashing SELL signals (see fig 1b), while speculative positioning shows that the market is already net LONG GBP (albeit levels are lower than in recent weeks, see fig 1a). This highlights that much of the short term bullish sentiment has already been priced in, which heightens the risk of a near term pullback.
Fig 1: GBPUSD futures shown with 50 & 200 day moving averages
Fig 1a: Speculative net positioning in GBP vs. GBPUSD
Fig 1b: GBP market timing model vs. GBP spot price
