GBP Confirms Status as EM Currency

• Global risk off environment combined with renewed geopolitical risk have been weighing on 'risk-on' assets, including GBP.
• Historically, the British pound has been the weakest performing currency in high-volatility regime among the G10 world, averaging -30bps in monthly returns when VIX is trading above 20.
  • The top chart shows the average monthly performance of the G9 currencies (vs. USD) when the VIX rises above 20 since January 1990 (VIX inception); the choice is arbitrary but a VIX higher than 20 has generally been defined as a 'high-volatility regime'.
• In addition, we have seen that GBP/USD has shown a strong co-movement with EM equities since the EU referendum in June 2016 (bottom chart).
• Therefore, the underperformance of theUK economy (relative to the US), rising recession risks (BoE raised flag today that UK is heading for a recession), vulnerable EM equities and persistent USD strength could continue to weigh on Sterling in the near to medium term.
• Cable broke back below its 1.25 support in today's trading session, which corresponds to the 61.8% Fibo retracement of the 1.1410 - 1.4250 range.
  • Next support to watch on the downside stands at 1.2260 (June 2020 low).

Source: Bloomberg/MNI.