The great thing about being a sterling trader is that there is never any shortage of volatility. This week is going to be no exception with Friday’s meeting of the Tory party looming as the next big Brexit-based risk event. The party will be voting on the latest plan (if there is one that is!) with customs agreements highest on the agenda. I’ve read one analyst who said there is a 15-20% chance that Theresa May will not even be the leader after the weekend. If that were to happen, we’d see a big move out of GBP early next week.
I have little doubt that the market is short GBP already but it has every reason to be. The positioning is nowhere near the levels that were built up post referendum so there is still plenty of potential downside if the market turns super bearish.
- If the general mood is positive after the weekend then sterling will definitely rally as some of the short-term hedges and speculative shorts get taken off. I’d expect any rally in the GBP to be limited to 1-1.5%.
- The downside for GBP is (as always) another matter. Depending on the nature of the outcomes, I can imagine sterling coming under severe pressure early next week. I hope we don’t see panic, but we can expect some potentially nasty gaps.
I am running a small (basically un-leveraged) core long position in EUR/GBP. Even if we get a 1.5% move then it won’t hurt too much. I will wait and see what happens on Monday, either get out or start adding.
I usually prefer to trade the cable intraday and won’t have any open positions over the weekend.
May you live in interesting times.