"We are Left with Better Levels to Engage in GBP longs"

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Pound Sterling has fallen heavily against all major counterparts over the recent week, but traders should buy into the resulting dip against the Euro and safe-haven Swiss Franc, according to Barclays strategists.

Sterling became the speculative market’s largest net long position in July as bets on the British currency swelled to a record size but it has unraveled much of the second quarter’s gains this last week.

A dovish repricing of the outlook for interest rates at the Bank of England has weighed on the currency, alongside a meltdown in global stock markets and a slew of poorer-than-expected US economic figures that have led investors and traders to bet confidently that US interest rates will be cut multiple times this year.

“Once (modest) long positioning clears and volatility drops, however, we are left with better levels to engage in GBP longs (particularly versus the EUR and the CHF),” Barclays strategists said in a recent research briefing.

“Demand resilience, what looks like to be a slow cutting cycle by the MPC and prospects for supply-side improvements via a closer EU-UK relationship continue to dictate a constructive view,” they added.

Above: Pound to Euro rate shown at daily intervals with Fibonacci retracements of November uptrend and selected moving averages indicating prospective areas of support.

The slump in global markets led low-yielding funding currencies like the Japanese yen and Swiss franc to outperform while weighing heavily on high beta and high carry counterparts.

“The pound's high sensitivity to risk asset performance was in evidence last week despite a fairly hawkish first cut by the BOE” the Barclays strategists said. “All that being said, G10 low yielders appear stretched already.”

The simultaneous repricing of the outlook for the Bank of England interest rate has led Sterling to underperform all other major currencies since last Thursday, however, Barclays says the Pound should benefit now that volatility has receded and the market has regained its appetite for risky assets.

Expectations for Bank Rate have fallen, leading Sterling to unravel much of this year’s rally against the Euro, despite Governor Andrew Bailey and chief economist Huw Pill both stating last Thursday that further interest rate cuts are likely some months off still, seemingly ruling out a cut at the next meeting in September.

The timing of further cuts depends partly on the July inflation data out next Wednesday, although BoE said last Thursday that it would not respond to any singular month of data surprises. The bank is looking for inflation to rise again, to 2.75% by year-end, which also potentially rules out a cut at the September meeting.