GBP: 5 reasons to remain short on the pound (Deutsche Bank)

Deutsche Bank believes that the GBP should still fall on the forex in the medium term and it recommends that traders remain short.

1- Negotiations of Article 50 should begin with difficulty. The date of the beginning of the discussions will probably be the 9th of March. A stabilisation of the GBP would require rapid clarification on a transitional arrangement between the UK and the EU. This seems unlikely.

2- There is no alternative to a hard Brexit. Negotiating multiple free trade agreements at the same time as discussions with the EU over two years is neither realistic nor good policy. We are particularly pessimistic about the prospects for a trade agreement with the United States.

3- Markets are already positioned for a hawkish BoE. Markets expect a 50% chance of a rate hike this year. This seems optimistic.

4- The income balance will not help the current account. Exports barely responded to the decline in the GBP and the trade deficit deteriorated.

5- Valuation is not at extremes. The fundamental value of the EUR/GBP PPP is at 0.85, which means that the pound is not inexpensive compared with the partner with which UK trade will suffer the most.

In sum, while volatility will remain high, we remain comfortable with our forecasts of a GBP/USD at 1.10 and a EUR/GBP close to parity this year.