With momentum indicators near extremes, there is a good opportunity to short EUR/GBP.

Sterling is benefiting as global investors look for alternatives to the two major currencies, the dollar and especially the euro. With the SNB effectively pegging the Swiss franc to the euro and given the limited liquidity in the Swedish and Norwegian crowns, investors have been turning to sterling.

This trend should continue.

Despite the widening current account deficit, the U.K.’s basic balance is improving rapidly due to a swing in long-term capital inflows. The technical picture for EUR/GBP has improved significantly. The cross retraced to its 200-day moving average, which held as a key resistance level. Also, the deeply oversold conditions from this summer have been worked off. In fact, EUR/GBP is now becoming overbought. This is bearish from a contrarian perspective. Finally, EUR/GBP is still overvalued: our PPP model suggests that another 10% of downside is easily possible.

For these reasons, our Foreign Exchange Strategy service recommends a short EUR/GBP position.

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