Foreign exchange analysts at BNP Paribas suggest the Euro (EUR) is tipped to rise against the Pound Sterling (GBP) in the near-term outlook.
They believe that although UK data has been surprisingly strong recently, the underlying data strength remains subdued.
"UK data have been surprisingly strong recently, but surprises tend to mean revert and underlying data strength remains subdued," says Oliver Brennan, FX Volatility Strategist at BNP Paribas.
The analyst says, "Short-GBP positioning has also been a tailwind for GBP this year. But now that the client survey component of GBP positioning – a proxy of real-money positioning – has flipped from short to long, the positioning backdrop may be clean."
Euro to Pound (EURGBP) Exchange Rate Tipped to Gain
Although UK data has shown unexpected strength, the overall vigour of the data remains low.
The analyst suggests a mean reversion tendency in the data surprises, hinting at a likely change of course.
Additionally, the shift in GBP positioning from short to long suggests a fresh slate for the currency's performance, presenting an attractive opportunity for GBP short positions.
The analyst also anticipates a singular additional hike at the Bank of England's forthcoming meeting, but sees the risk leaning more towards no change than a hawkish shift.
He notes, "We expect one further hike at the Bank of England’s next meeting, but the risk is skewed more towards no change than towards a more-hawkish shift."
However, Brennan emphasises the importance of timing in entering GBP short positions, given the positive GBP carry and the uncertainty surrounding the weakening economy's potential impact on the Bank of England's stance.
"All the above factors support re-entering short GBP positions. But the combination of positive GBP carry and uncertainty around when a weakening economy may trigger a change in BoE stance means timing the weakness is as important as identifying the opportunity," Brennan adds.
Brennan proposes a trade strategy that seeks to capitalise on this analysis by initiating a long EURGBP position via a digital call with a knockout above the recent range high.
He explains, "We structure a long EURGBP position via a digital call with knockout above the recent range high. The knockout makes the structure less than half the equivalent single digital premium. Theta is positive at inception, and the structure decays shorter-GBP delta over time."
Despite the current low level of implied volatility in Euro to Pound exchange rate (EURGBP), which is in line with most G10 FX pairs over the past month, Brennan cautions that it is not yet a cheap currency.
They believe that although UK data has been surprisingly strong recently, the underlying data strength remains subdued.
"UK data have been surprisingly strong recently, but surprises tend to mean revert and underlying data strength remains subdued," says Oliver Brennan, FX Volatility Strategist at BNP Paribas.
The analyst says, "Short-GBP positioning has also been a tailwind for GBP this year. But now that the client survey component of GBP positioning – a proxy of real-money positioning – has flipped from short to long, the positioning backdrop may be clean."
Euro to Pound (EURGBP) Exchange Rate Tipped to Gain
Although UK data has shown unexpected strength, the overall vigour of the data remains low.
The analyst suggests a mean reversion tendency in the data surprises, hinting at a likely change of course.
Additionally, the shift in GBP positioning from short to long suggests a fresh slate for the currency's performance, presenting an attractive opportunity for GBP short positions.
The analyst also anticipates a singular additional hike at the Bank of England's forthcoming meeting, but sees the risk leaning more towards no change than a hawkish shift.
He notes, "We expect one further hike at the Bank of England’s next meeting, but the risk is skewed more towards no change than towards a more-hawkish shift."
However, Brennan emphasises the importance of timing in entering GBP short positions, given the positive GBP carry and the uncertainty surrounding the weakening economy's potential impact on the Bank of England's stance.
"All the above factors support re-entering short GBP positions. But the combination of positive GBP carry and uncertainty around when a weakening economy may trigger a change in BoE stance means timing the weakness is as important as identifying the opportunity," Brennan adds.
Brennan proposes a trade strategy that seeks to capitalise on this analysis by initiating a long EURGBP position via a digital call with a knockout above the recent range high.
He explains, "We structure a long EURGBP position via a digital call with knockout above the recent range high. The knockout makes the structure less than half the equivalent single digital premium. Theta is positive at inception, and the structure decays shorter-GBP delta over time."
Despite the current low level of implied volatility in Euro to Pound exchange rate (EURGBP), which is in line with most G10 FX pairs over the past month, Brennan cautions that it is not yet a cheap currency.