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Despite the Brexit, Pound May Be 2017's Best Positioned Major

Despite the Brexit, Pound May Be 2017's Best Positioned Major

2016-12-30 05:29:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Where the Euro is in many ways the worst positioned major for the coming year, the Pound may be its best
  • Brexit is still clearly looming over the Sterling, but progress on the UK's divorce from the EU will now take a clearer path
  • Most of the opportunity from the Sterling rests with the extreme speculative concern already priced into the currency

See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.

Yesterday's strategy video focused on which of the major currencies faced the greatest threats in 2017 - for many reasons, it seems to be the Euro. Now, we discuss its opposite on the opportunity scale: the Pound. While there are many positive fundamental scenarios that can take shape in the coming year to help out various currencies, the combination of probabilities for various scenarios and the impact should they be realized mark the Sterling as the FX market's most prominent standing.

There is little doubt that the Pound faces clear - even inevitable - risks moving forward. Lackluster growth is a global norm, but progress on the Brexit is where most investors will look first and foremost for guidance on the currency. The UK government's plans, the Supreme Court's ruling as to whether Parliament has a say, invoking the actual separation procedure (Article 50) at the end of March and negotiations are all realities that the currency faces ahead. Yet, the greatest skew for for the Sterling to respond to moving forward is the current, extreme level of speculation.

GBP/USD is arguably the most extreme of the Pound-based crosses at three decade lows, but the crosses uniformly reflect pain. In fact, there is a strong argument to be made that the view for the deep discount is a 'worst-case-scenario' view of Brexit as well as all the related and unrelated risks ahead. While this particularly cumbersome event and other threats are certainly ahead, the deep crisis reflected in the current exchange rate is very unlikely to come to pass. The government and its counterparts across the negotiation table for Brexit conversations have little incentive to light the markets on fire. As a more moderate path is traced out, the deep discount in the Pound will look increasingly attractive to global traders. Further, with the BoE's view on monetary policy, the favorable contrast to Euro-zone issues and the appeal of the Sterling's reserve status will all cater to its opportunity ahead. We focus in on why the scenarios and impact of the Pound's event risk position it as one of greatest opportunities for 2017 in today's Strategy Video.

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