GBP: US election prompts position shake out benefitting the pound - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the foreign exchange market has been more stable overnight with the dollar index holding just below key resistance from the previous cyclical highs.

Key Quotes

“The sharp adjustment higher in US yields following the election has also paused for some breath after approaching resistance provided by the highs from last year. The election of President Trump has triggered heavy position liquidation across financial markets. The previously popular high yielding and emerging market currencies have been hit hardest by the unwinding of long positions built up during this year. In contrast, the pound has been the best performing currency since the election of President Trump. The outperformance of the pound likely mainly reflects a squeeze of elevated short pound positioning amidst the broad-based position shake out. The latest IMM report revealed the short pound positioning amongst asset managers and leveraged funds was still close to record highs heading into the election.”

“It has resulted in the trade-weighted pound reversing the sharp decline recorded during October which included the flash crash on the 7th October. The price action supports our view that pound weakness during October was mainly sentiment driven which became excessively bearish towards the pound driven by “hard Brexit” fears, and was not fully justified by the UK’s fundamentals. We continue to believe that the bulk of the adjustment lower for the pound is now complete. A period of consolidation at lower levels is more likely than another sharp adjustment lower having already lost around a fifth of its value over the last year and a half.”