Model continues to flag selling GBP on strength - Westpac

Westpac's High Conviction FX Trades Report notes that they remain flat this week, despite its process continues to flag selling GBP on strength.

Key Quotes

"GBP fell 30% peak-to-trough in both in the 1992 ERM exit and the 2008 global crisis. A similar move today would place GBP/USD nearer 1.05(!), but of course GBP’s starting point in 1992 and 2008 was nearer 2.0, very inflated and heavily overvalued on just about any metric. Adjusting for that, GBP’s new post-Brexit equilibrium is arguably a more modest 1.20-1.25. GBP could easily recover back to 1.36-1.38 in coming days as it backfills the Brexit driven price gaps but prefer to be a seller on strength near term. A materially weaker GBP will play a crucial role in rebalancing the economy and cushioning it from a likely recession."

"The outlook shifts if Article 50 is not invoked, a second referendum is called or a snap general election is held where Brexit is likely to be contested once again. But, all the indications from current UK and EU leadership are that while there may be a delay to invoking Article 50 there’s no going back. Moreover, a clearer view on this front won’t emerge for some months and in the interim the BoE is very likely to upend GBP anyway via cut rates and a resumption of  QE. Out of an abundance of caution we set our GBP sell levels well away, 1.3855, the 38.2% retracement level of Brexit decline from 1.5050 to the 1.3120 lows. Stop 1.4020"