An outside chance
Sterling has amassed one of the largest net short positions in its recent history. By that I mean that, within the options space and based upon the disclosed commitments of traders, the number of participants positioned to benefit from Sterling’s decline towers over those expecting a rally in GBP by a record margin. But that’s not news. The market has been that way for many weeks. What was initially supportive of a short-Sterling exposure was that we knew those same investors were looking for pay outs beyond the local election date now well behind us of May 7th.
At the time that was a significant headwind to GBP, limiting the prospect of a short squeeze. Nearly three weeks on and, aside from some minor moves in the last two sessions, GBP remains well supported. Now, perhaps, it is time to be discussing the outside chance of a Sterling short squeeze and a false relief rally. What does that look like and how would we get there? Well, Sterling has three short-term lifelines: first and foremost it’s a very expensive carry. By that I mean that the cost of obtaining downside exposure to Sterling is astronomical. That’s both because of the crowding of downside trades in the options space as well as it having the highest implied overnight yield in the G10 space.
In addition, a major headwind for GBP was the prospect of Andy Burnham as a contender for PM. However, that trade is going to be on the back burner until at least June 18th when the results of the Makerfield by-election draw into view. Lastly, a resolution on the Iran war had, at least up until last week, felt very much more like a when not an if. Resolution there is also a tailwind to both GBPEUR and GBPUSD. I’m not advocating that the Pound should be stronger, far from it; longer term forecasts still favour a materially lower GBPEUR (albeit not GBPUSD). However, positioning and sequencing might mean a false rally takes place first.
Discussion and Analysis by Charles Porter
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