Forex Flash: EUR up, GBP down based on IMM and fundamentals – UBS

According to Research Analyst Geoffrey Yu at UBS, “We continue to see the current market as one purely driven by positioning, though policymaker opinions are catalysts for reversals of some short-term extremes, either for longs or shorts. In addition, we note the extremes sometimes need not only be measured by the size of the positions, but also the speed at which they were accumulated.”

The way the EUR and GBP have behaved last week are good examples. IMM figures just released on Friday show how markets were positioned heading into the policy meetings/statements on Thursday by Messrs King, Carney and Draghi. Sterling shorts were accumulated extremely quickly in January, and even our own flow data showed that selling in the GBP/USD by certain client groups was the strongest (on a weekly basis) in several years.

“For the EUR, the pace of the unwinding of entrenched shorts was even more aggressive. For both currencies, the absolute size of positions in shorts, according to the IMM, remain flat at best, however in essence the market needed to slow down and Draghi's smallest inkling of concerns for the pace of appreciation was enough to achieve this.” Yu adds. Nonetheless, in the short term, the direction of positioning accumulation remains quite clear, and GBP downside and EUR upside are still dominant on a directional basis, not to mention with some fundamental justification as well.