GBP has started the new year on a very weak note due to a negative combination of rising Brexit concerns, waning Bank of England (BoE) rate hike expectations and negative risk sentiment.
In the short term, we expect GBP to remain under pressure in a negative risk environment. However, GBP is significantly oversold, according to our short-term financial models, and we still look for a rebound in the coming three-six months driven by a repricing of the BoE, as the UK economy is expected to continue to grow above trend in 2016.
We revise our EUR/GBP forecast higher and now target the cross at 0.74 (0.71) in 1M, 0.73 (0.70) in 3M, 0.71 (0.70) in 6M and 0.75 (0.73) in 12M. GBP/USD is expected to increase to 1.55 in 6M.
As one of our eight FX Top Trades for 2016, we recommended buying GBP/USD to position for higher UK interest rates. We still like the trade and we lower the stop-loss target from 1.44 to 1.40.
We recommend EUR- and DKK-based corporates to hedge GBP income up to six months via options while GBP-denominated expenses should be hedged via FX forwards.
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