Selling GBP/USD a ‘High Conviction’ Trade at Westpac

Any strength in the pound to dollar exchange rate strength is forecast to be temporary according to analysts at Westpac.

The pound sterling has snapped a four day winning streak against the US dollar and has turned lower towards 1.4148.

Declines come in the wake of a turn-around in fortunes for the US dollar which appears to be enjoying the improvement in investor sentiment seen in the mid-week session. Indeed, the gains come some poor domestic data in the form of retail sales.

The inability of the British pound to reach the March highs towards 1.44 will however have disappointed speculators who were looking to the level as a good entry point to enter negative bets on the GBP/USD.

Strategists at Westpac are nevertheless sticking to a high conviction call that seeks to sell the pound sterling on any strength.

“Even if the polls break toward more clearly toward "Bremain" ahead of the 23 June referendum it’s hard to see GBP forcefully unwinding its Brexit premium until the certainty of the vote is out of the way,” says Martina Song of Westpac Global Strategy Group.

Westpac are looking to sell GBP/USD at 1.4450 with a stop-loss placed at 1.4610 as protection on any unforeseen sterling strength.

According to Westpac’s modelling, the GBP remains heavily out of favour at -17.7% of their portfolio exposure.

“The bearish view is predicated more on a negative trend in gilt yields and poor external accounts,” notes Song.

Brexit risk is not a driver of the model's bearish GBP stance.

A vicious squeeze higher likely to be seen if the EU referendum polls and vote pan out in similar fashion to the Scottish independence vote and the last UK general election (i.e. strong gains for the status quo), “but that is a trade for another day,” says Song.