UK - Trading Places

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UK - Trading Places

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too far 10 July 2026) with GBP/USD IMM positioning still rooted towards sizeable shorts.

However, whilst carry remains the dominant theme in G10 FX and should provide some

support, the move has been sharp and rapid. For EUR/GBP this suggests a period of

consolidation before the next leg lower. We have consequently turned neutral in the

near-term. GBP. For GBP/USD, the recent rally in USD leaves the pair less exposed to

momentum extremes. We therefore continue to favour being short volatility in the pair

over the near term, particularly given FX volatility's tendency to grind lower through the

summer. Further out, however, the combination of the US midterms and the next UK

budget event in November is likely to result in a meaningful pickup in volatility. To

express this view, we recently recommended selling 2M ATM straddles versus buying 6M

OTMF strangles for zero cost as a proxy for forward vol (Mid-year ahead, 25 Jun '26,

current pricing -0.68%, spot ref 1.3440, vol refs 6.7%/6.2%/7.2%). See report:

Unyielding dollar yield 17 July 2026. Risks to the trade are an abrupt rise in vol on

geopolitical concerns in the coming months.

Our neutral stance on GBP is highlighted via our analysis of GBP/USD. Static rates-based

model suggests GBP/USD is materially overvalued. However, that specification performs

poorly in recent years. A 500-day rolling framework incorporating UK-US yield spreads,

FX volatility, GBP risk premium and a broad USD factor generate a fair value of roughly

1.33 versus spot at 1.35. Sterling therefore appears only modestly rich, by around 1-2%,

rather than substantially overvalued (see chart of the day).

Rates: Long time no see

Energy prices are again among the key drivers of UK rates since the US-Iran ceasefire