Pound to Dollar a Conviction Sell at Westpac and ABN Amro, Here are the Entry and Exit Levels

Two major banks have strongly advocated selling the GBP/USD exchange rate in June.

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The British pound is seen to be in recovery mode on June the 7th, however such strength is unlikely to be long-lived according to two major FX strategists.

We have heard from both ABN Amro and Westpac Institutional Banking that spikes in GBP/USD offer good entry points ahead of further, more protracated declines.

Dutch lender ABN Amro have issued a 'conviction' sell call for the pound, against the dollar, as Brexit fears ratchet up in the last few weeks before the referendum on membership of the EU.

"With the uncertainty growing, we think that there will be further downward pressure on sterling ahead of the referendum. Therefore, we have put on a sterling short versus US dollar again (in our previous position the stop loss/profit protection was hit)."

ABN Amro's Coordinator of FX and Precious Metals Strategy, Georgette Boele advocates selling at market and placing a stop at 1.4800.

Boele thinks the dollar is the best counterpart for the trade as it is more likely to strengthen than the euro, which could devalue due to exit contagion fears, and the yen, which is overbought.

The analysts did not discuss the relative merits of selling the pound against the Swiss Franc, which has been touted as a suitable counterpart by HSBC's David Bloom, due to it being a major safe-haven, and therefore likely to appreciate on increased Brexit risk.

Abn Amro's trade is similar to a high conviction call from Australian lender Westpac, who recommended selling GBP/USD in the 1.4480s on June 1, with a stop loss at 1.4640. Although narrowly avoiding getting stopped out on since then their short still lives on.

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Whilst the vast majority of analysts still expect the UK to vote to stay in the EU, it appears some have been spooked by the recent strong poll results scored by the 'Leave' campaign, and are not as certain of the outcome.

Sean Lee at Forextell, for example, warns against any complacency as to the outcome:

"I would advise a great deal of caution heading into the Brexit vote. While my base case is that the UK does stay in the EU, there is a serious risk of an outlier event (think SNB removing the floor but not as big). The vote itself is not until 23rd of June, so it’s fine if you are a short-term/swing trader for now, but long term traders should already be planning ahead how they want their portfolio to look heading into the event."

How low could she go?

In the worst case scenario of the UK voting to leave the pound is expected to weaken between 15% and 20% according to most analysts, including HSBC's David Bloom and the FX team at UBS, who forecast GBP/USD falling to parity if vote Leave win.

In the short-term, pre-referendum period, Commerzbank's Karen Jones also sees risks tilted to the downside, but would require more confirmation before forecasting lower rates, with only, "a close below the 1.4273 two- month uptrend," leading to a deterioration of the chart picture. 

This would then open the way to a continuation south to 1.4083/05, "where the January and April lows were made."