Deutsche Bank - Buy EUR/GBP and sell GBP/USD

Deutsche Bank - "The pound's greatest flow strength could turn out to be its greatest weakness though. In contrast to Switzerland's steady inflow, the UK saw a 350bn GBP collapse in short-term flows in the first few years of the crisis, only to subsequently rebound as Eurozone tail risks picked up (chart 2). This could reflect outright inflows or liquidation of UK assets and hoarding in cash. We think this pattern puts sterling at major risk this year. First, we doubt this pace of unconventional inflows can be maintained, which in turn would mean that the traditional balance of payments dynamics (trade and portfolio flow deficit) re-assert themselves. Second, we think there is a risk these inflows reverse, on the back of UK downgrade risks and ongoing exceptionally poor macro performance. Combined with the risk of a building policy premium to build into the Carney BoE leadership transition, the very poor quality of UK inflows is one of the main reasons behind our core bearish view for sterling this year: buy EUR/GBP and sell GBP/USD."

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