Synopsis:
Credit Agricole is cautious on the GBP in the near term due to two main factors. The GBP is currently one of the most heavily long positions in G10 FX, and many positive factors seem already priced in. The vulnerability of GBP/USD and potential deterioration in market risk sentiment are significant concerns. Meanwhile, EUR/GBP may stay relatively stable due to expectations of a dovish ECB rate cut.
Key Points:
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Long GBP Positions:
- The GBP is heavily positioned long in G10 FX, suggesting that many positive factors might already be reflected in the currency’s price.
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Factors Affecting GBP/USD Vulnerability:
- Exessive Dovish Fed Outlook:
- Credit Agricole believes the market is still too dovish on the Fed's stance, which could impact GBP/USD negatively.
- Market Risk Sentiment:
- There is a lingering risk of deteriorating market risk sentiment, which could also weigh on the GBP.
- Exessive Dovish Fed Outlook:
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EUR/GBP Outlook:
- EUR/GBP might remain grounded due to expectations of a dovish rate cut from the ECB, which could limit significant movement in this currency pair.
Conclusion:
Credit Agricole’s caution on the GBP stems from its substantial long positions and the likelihood that the currency's current positives are already priced in. The potential for a dovish Fed and deteriorating market risk sentiment pose risks for GBP/USD, while EUR/GBP is expected to remain relatively stable in light of anticipated ECB actions.