Strategists at Westpac Bank in Sydney have briefed clients on a new trading strategy that looks to profit on impending weakness in the British Pound.
In a note to clients titled ‘Macro FX Ideas’ Westpac’s Global Strategy Group say they look to sell GBP/USD at 1.2590 and target a fall to 1.2370.
The call comes after the Pound was seen to have risen in the wake of the UK's triggering of Article 50 of the Lisbon Treaty.
We note that initial concilliatory words from Prime Minister May and Donald Tusk at the European Council might have been behind the rise.
There is also the possibility that traders are trading the Pound in a typical 'sell the rumour, buy the fact' fashion.
This resillience is an extension of the Pound's recent bout of strength that has seen it rising on the back of better-than-forecast UK economic data and 'less dovish' minutes from the Bank of England.
But, the “realities of Brexit are still likely to dent confidence,” say Westpac, pointing to hard times ahead.
Above: Nerves show on the Pound to Dollar rate's charts as traders pare exposure to the UK currency on the day Article 50 of the Lisbon Treaty is triggered.
Also tipped to weigh on Sterling over coming days and weeks are ructions from both SNP and a divided Northern Irish Assembly which are adding pressures to UK negotiations and the fabric of the UK.
Then there is the added view that recent US Dollar strength might be fading.
“USD unwinds have returned many currencies toward pre-November election levels,” say Westpac.
With regards to the all-important Trump agenda, while the administration may have failed to enact AHCA reform but may be able to present tax reforms that can gain Congressional approval, even if they are less reflationary
If Westpac are wrong and the Pound were to recover then strategists advise a stop-loss is triggered at 1.2655 in order to protect the trader’s capital from undue losses.