Global | Turning cautious on GBP

We believe now is the time to close out our tactical bullish GBP call, initiated in March, as the almost year-long rally in GBP looks increasingly exhausted.

Fundamental valuation anchors, which helped sustain sterling over the last nine months, have eroded. With the FX valuation gap now closed, net equity flows into the UK are also showing a strong sense of crowdedness, relative to peers.

GBP positioning indicators remain elevated and are nearing extreme levels, and given the high correlation of sterling with broader risk assets, any rise in US long-term yields and/or pull back in equities could easily spill over into GBP sentiment, resulting in an overdue correction.

This is not to say we expect a depreciation from here, rather, we expect GBP to trade in a range for the rest of the year, albeit with risks to the downside.