UK fundamentals has changed quite a bit for the past 3 weeks. This has been due to the increasing tension with the European Union in securing a trade deal.
Other than not agreeing on a trade deal, the UK government adds fuel to the fire with a proposed bill dubbed “Internal Market Bill” that plans to safeguard its interest on Northern Ireland. This bill is a clear violation of the withdrawal agreement previously signed with the European Union causing more difficulties in reaching an agreement by October. Worse, US voiced great dissent on this bill that they expressed refusal in dealing with UK if they pass the bill.
So basically we have two underlying drivers for a GBP short:
1. Difficulty of reaching a trade deal
2. Proposed Internal Market Bill
UK is set to fully leave the EU on December 31, 2020. However, an agreement should be achieved by October to have ample time for UK to implement a law for the trade deal. The next EU-UK talks is set to be on September 28 to October 2.
Given this scenario, it is clear that GBP is a short against all currencies. The question is, which currency do we short this against and when do we start shorting?
The ideal short would be against a currency that is strong. Let’s try to figure out the possible scenarios here.
General market sentiment has been bearish recently. Personally, I gauge this by looking at US equities. If equities would continue to be bearish towards the next EU-UK meeting, shorting GBPJPY would be the best bet. If equities would start rebounding, GBPAUD will have a higher magnitude. Do note that choosing to short 1 pair over the other entails more risk than shorting both.
In terms of timing the position, the market reacted to the August meeting only until the last day. For the September meeting, the market was selling GBP at the start of the meeting. Is it possible that GBP would be sold off as early as this week? Nobody really knows.
This trade idea will take time to the actual flashpoint as much as reaching its target. My approach is to position trade and to enter in tranches. Technically, GBPJPY could still rally back up to 136.00-137.00 area. For GBPAUD, 1.7950-1.8100 would be great bargains for shorting. A 3% profit margin from entry would be conservative target.