Synopsis:

ING attributes yesterday’s sterling sell-off to a global bond market sell-off amplifying vulnerabilities in the gilt market, leading investors to unwind overweight sterling positions. While GBP faces modest downside risks, ING does not foresee prolonged independent sterling weakness.

Key Points:

1. Sterling’s Vulnerability:

   • The global bond market sell-off exposed sensitivity in the gilt market, prompting investors to cut back on overweight sterling positions.
   • Sterling had been viewed as resilient amidst the strong dollar trend, but the gilt sell-off dented this confidence.

2. Positioning Risks:

   • Investors reassessing sterling exceptionalism may further unwind long positions, increasing short-term downside risks.
   • ING highlights potential positioning-driven moves in GBP/USD and EUR/GBP in the near term.

3. Where to From Here:

   • ING does not see this as the start of sustained sterling weakness.
   • EUR/GBP is expected to stay near the 0.82/83 region, though the correction could extend to 0.8450/8500 if positioning unwinds further.
   • GBP/USD could test 1.2250, influenced by positioning and the incoming Trump agenda, but a drop to 1.20 is unlikely.

4. End-Year Forecasts:

   • ING remains bullish on the dollar and forecasts GBP/USD at 1.24 by year-end.

Conclusion:

While sterling faces short-term risks from positioning adjustments and global factors, ING expects limited downside and no prolonged independent weakness. EUR/GBP is forecast to remain range-bound, and GBP/USD is projected to recover toward 1.24 by year-end.