GBP Trade That’s Best When Risk Is on

05/04/2012 10:40 am EST

Focus: CURRENCIES

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

There’s surprising potential for the British pound to strengthen this year, says Boris Schlossberg, who believes trading the pound against the euro is ideal in risk-on conditions.

Well, the British pound is on the mind of a lot of traders, and our guest today is Boris Schlossberg to talk about where he thinks that currency is headed. Boris, how are you trading the pound these days?

It’s difficult to handicap the pound these days, because the UK economy had a contraction in Q4, and everything looked very, very dark. It looked like the hysteria the UK government has imposed on the UK economy is actually having a very negative impact and a major contractionary force.

But, there have been a few rays of sunshine at the start of this year. We’ve started to see much better economic data out of the UK, and I think the threat of continuing contraction has really gone away. If that’s the case, the pound may begin to strengthen as we go into the middle of this year.

The other big threat was that given the weakness of the UK economy and the fear that they were going to have a significant recession, their AAA rating was going to be under threat. But now, if they begin to recover, I think it’s going to be a very interesting testament to the idea that perhaps you could have the best of both worlds—austerity on the fiscal side and growth in the economy.

If they can actually prove to the world that’s possible, that’s going to create a very interesting model for the rest of the world and certainly strengthen the pound as we go forward.

How does it work with the euro and the pound? Do they correlate pretty well?

They do. It’s been a very volatile pair, especially over the last year and a half, because the euro/pound has been very much a reflection on European woes. Whenever people feel very fearful over the actual state of the euro, they’ve been selling euro/pound.

At the same time, whenever the euro really shows any kind of inkling of redemption—the idea that the Eurozone is going to remain whole—the euro/pound begins to really trade up because of better growth and better risk trade.

Euro/pound is actually, in many ways, a stealth risk trade that is risk on as a positive move for the currency. Risk off really kind of sells it off, so trading on those dynamics is probably your best bet.

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