FX Research – A Tale of Two Currencies – EUR & GBP

v Euro (EUR) and British Pound (GBP) experienced strong sell-off recently. Focus is shifting from Euro (EUR) to British Pound (GBP). Players are seeing more downside risks to it as it unwinding bullish bets on Bank of England (BoE) and risk of Scotland’s independence from UK. Is it true?

v In the latest week ending 9 September, speculators have build-up net short EUR contracts of 3.15 times more compared to 1.03 times on 20 May 2014 – volumes not seen since the Eurozone crisis. Meanwhile, speculators remained in net long GBP contracts even though players have started to pare their bullish GBP bets from July. The short GBP contracts are only showing gradual increase as the issue of Scottish referendum surfacing recently.

v  We assign higher probability that net short EUR position will continue to build up as EUR bears are convinced over Draghi’s determination to push the currency lower. On the other hand, we argue greater possibility of stronger net long GBP position if Scotland stays and BoE delivers its promises in early 2015. Westminster is stepping up its commitment to greater devolution for Scotland.