Chart Of The Week: GBPUSD - Should You Remain Or Exit?

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Includes: DGBP, FXB, GBB, GBPS, UDN, UGBP, USDU, UUP
by: Topdown Charts

Summary

With Brexit looming, global investors have shunned UK assets.

The British pound in particular has been punished and heavily sold.

This has left the GBPUSD undervalued and a crowded short, which are precisely the kind of conditions that make for a bullish contrarian outlook.

With Brexit looming, UK assets have been shunned by global investors; but as is often the case, sometimes the best investments are the ones that make you the most uncomfortable. And the pound may just fit the bill there.

The chart comes from a report which talked about the GBPUSD as well as the outlook for UK equities (a contrarian opportunity).

The chart of the week shows valuation and positioning for the UK pound vs. the US dollar, with the conclusion being that it's undervalued and a crowded short.

GBPUSD crowded short and undervalued

Specifically, it shows our valuation indicator which is based on PPP valuation and long-term mean reversion and is displayed as deviation from fair value (thus undervalued right now). It also shows speculative futures positioning (standardized against open interest), which is showing traders as short as when the Brexit decision was first announced.

Using valuation and sentiment together like this is an example of how we use multiple factors to help fill in the picture and build conviction. For example, back in 2017, the GBPUSD was in a similar situation of being materially undervalued and a substantially crowded short. This created the right mix of probabilities to see a rally in the pound.

The other factor in play is that our composite measures of economic confidence in the UK are largely stable, and on monetary policy, the Bank of England is now in a process of gradual rate hikes - both of which are factors that tend to support the currency.

So while the prospects of a bad Brexit are certainly real, the big question is whether markets have become too pessimistic... judging by the valuation and positioning indicators, I'd say it sure looks like it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.