Is this time for traders to be GBP-In or GBP-Out? As June fast approaches, bringing the UK-EU referendum with it, the GBP has lately been showing signs of resilience that suggest that markets may be way too optimistic about what is coming.
To be true, no one knows if the British people will be in favor of a ‘Brexit’ or a ‘Bremain’. Surveys are, however, showing that the ‘Brexit’ side has been gaining strength – and has been ironically helped by Obama’s recent passive-aggressive threats to the Brits if they chose to get out of the EU.
For traders, this means that there is an opportunity building in the horizon. Today we learn about the UK Services PMI, which is expected to stay close to its previous print of 53.7. If that is the case, the GBP may go on showing signs of its recent resilience.
Still, Ridge Capital Markets believes that the rising odds of a ‘Brexit’ are likely to make May a high-pressure month for the GBP.
Given that no clear scenario can be anticipated, and considering that no one can know exactly how a ‘Brexit’ would play out, namely when it comes to financial markets, we believe that even a strong PMI, if it does come out, cannot compensate the underlying pressures that the GBP is about to face more significantly.
On Monday, after touching the low of 0.67719 GBP per USD, the British currency started giving up on its recent gains against the US currency.
A recovery in the DXY, a drop in oil and concerns about China and the Eurozone sent the USD on its path to a mild but noteworthy recovery, gaining ground against the GBP. It went as high as 0.69121 GBP per USD yesterday.
Interestingly enough, the GBP has also been underperforming against the EUR, especially since Draghi disappointed the markets in his last press conference, keeping ECB’s interest rates where they were before.
However, at Ridge Capital Markets we do not believe in the EUR’s current strength. After all, the Eurozone has severe problems that only keep mounting.
The latest Eurozone data just confirms that there is more trouble ahead, and as far as anyone knows, a ‘Brexit’ can be far more damaging to the Eurozone than to the UK.
That is why we prefer to stay bullish on the USD/GBP currency pair, believing it can go up to the 0.72 range of last February, so we recommend traders to seek profits in that move, while just keeping a close eye on the EUR/GBP behavior.
Ultimately, we believe these two currencies will lose ground to the USD, so the US currency makes far more sense to us as an investment, than taking unjustified chances on the EUR.