Risk-off intensifies – watch GBP!

FX View: Financial conditions continue to tighten and with that the US dollar has
strengthened further. We see no reason at this juncture to argue any change in
dynamic and expect this strength to continue. The S&P 500 hit a new year-to-date
low yesterday, some 24% down from the record high in January. Our correlation
analysis shows a strengthening of the VIX / USD correlation. Risk-off is now the
driver of USD strength, not relative macro. We focus on the GBP outlook this week
and argue that the rebound in GBP/USD since the BoE intervention in the Gilt
market is unlikely to last. Whatever steps are taken now, a damage to investor
confidence has been done and given the combination of broader risk aversion, a
large current account deficit, inflation concerns and a cautious BoE, the pound
remains vulnerable to a renewed correction back to the lows recorded this week.

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