"We're leaving. We're coming out. We're not going to be a member of the EU any longer."
–U.K. Prime Minister Theresa May
Prime Minister May made the comment above in an interview on Sunday, dismissing entirely the possibility that the UK might "keep bits of membership" to the European Union. The British Pound was down more than -1% on that news this morning. Investors feared the repercussions of a long, drawn-out “hard Brexit” from the European Union.
We believe those fears are overdone.
WHAT TO BUY
We think this is an opportunity to get long the British Pound (FXB). We suggest investors buy the pound on pullbacks, like today, and sell on days when the pound rises in value. The immediate-term risk range (our proprietary ranges that change daily) today is $1.21 – 1.24. Essentially, when the pound hits the low-end you buy and at the top-end you sell. Simple.
Another reason to buy the pound? Wall Street consensus is still short.
As you can see in the video above, institutional investors are net short pounds by -60,109 contracts (futures and options), according to data from the CFTC. Just three months ago, consensus was short pounds by -90,000 contracts before getting squeezed out of those positions. The pound rose 5% from mid-October to the December highs of $1.27. Wall Street was forced to cover shorts.
As we pointed out recently, the British economy grew +2.2% year-over-year growth in the third quarter. That was even better than the USA’s +1.7% year-over-year growth rate. Despite Brexit fear-mongering, we think the U.K. economy will continue to grow and Wall Street capitulates (once again) on these short positions.