CitiFX Strategy – Trade of the week: Sell EURGBP

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Our weekly trades will provide short term guidance on where we see 1-2 week opportunities in G10 FX markets. Unless we explicitly extend them, they will close out automatically at COB the second Friday after they are introduced.

Trade idea: Sell EURGBP at 0.6998, target 0.6750, stop loss 0.7115

Our view:

  •    GBP should be one of the major beneficiaries of the weekend developments in Greece given its non-USD safe haven status. While there will be potential for some back and forth on EUR following the gap lower on the open on the basis of headlines, the progression of events in the next several days should ultimately see continued pressure given potential for the ECB to remove ELA upon a failure to meet the IMF payment and likelihood for intensifying political strain within Greece. In the background, accelerated ECB asset purchases to limit contagion would represent a further EUR negative. In light of risk for some exaggerated moves on ongoing news flow, we are running a somewhat wider stop than we typically adopt for trade of the week.
  • We prefer GBP to CHF given that direct feedback to UK policy is likely to be limited. Investors will be more tentative on prospects for a 2015 rate hike, but these were already low and BoE policymakers have expressed slight unease with how flat this trajectory is, which could act as a bulwark against more pronounced declines. By contrast, the SNB is likely to be active in FX markets in response to European developments and investors may move to price in a Swiss rate cut, so it presents a less attractive safe-haven.
  • Short EURGBP is likely a consensus view, but positioning does not yet reflect the degree of market conviction. Our flow data shows a pick-up in GBP buying by leveraged investors, but this follows a period of selling and buying in the real money sector has actually begun to taper in recent weeks. As such, investors should have scope to add longs and the technical breakdown beneath key support at 0.7015 may encourage such buying. The breakdown in support beneath this level implies a technical move towards 0.65.