Credit Agricole: GBP remains a best G10 FX bet despite risk aversion

Credit Agricole sees GBP as one of the best-performing G10 currencies, despite recent setbacks due to returning risk aversion and stickier-than-expected UK inflation. The GBP’s relative strength is attributed to expectations that the BoE will maintain rates, reinforcing its status as a top performer in the G10 FX space.

Key Points:

• Recent Performance:

  • End of Winning Streak: Risk aversion and stickier UK inflation have ended GBP’s recent winning streak.
  • BoE Rate Expectations: The market expects the BoE to keep the bank rate unchanged on 1 August, postponing any rate cut decision to later in the year.

• Upcoming Data Focus:

  • UK PMIs for July: The focus will be on the UK PMIs, particularly evidence of economic recovery extending into Q3.
  • Economic Resilience: Persistent economic resilience might convince policymakers to delay easing beyond August, although it is not central to the current debate.

• FX Market Reaction:

  • Relative Expensiveness: Following its recent rally, GBP looks expensive against both EUR and USD when compared to short-term fair value estimates based on its relative rate appeal.
  • Long Positioning: GBP remains one of the biggest long positions in the G10 FX market, warranting cautiousness on the near-term outlook for the currency.

Conclusion:

Despite recent challenges, GBP continues to be one of the best-performing G10 currencies, supported by expectations of stable BoE rates and economic resilience. However, its current expensive valuation and significant long positioning suggest cautiousness in the near-term outlook. Upcoming UK PMIs will be critical in assessing whether economic recovery can sustain this momentum.

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This article was written by Adam Button at www.forexlive.com.