Traders line up to sell British pound with recession on the horizon

British Union Flag, also known as Union Jack, and American Flag at ETX Capital, a CFD broker. Sterling is down more than 8% against the dollar, attracting short bets from traders as the British economy faces rising inflation and a cost-of-living crisis.

Chris Ratcliffe | Bloomberg | Getty Images

LONDON – Traders are increasingly short against the British pound as the UK’s cost of living crisis begins to unfold.

Inflation came in at 9% annually in April, the highest in 40 years, as food and energy prices continued to climb after the UK’s Energy Regulatory Authority raised the ceiling on household energy prices by 54% at the start of the month.

Bank of England Governor Andrew Bailey warned of a “dreadful” outlook for consumers as a recent survey also showed that a quarter of Britons skipped meals.

Sterling is down nearly 8% against the dollar year-to-date, hovering just under $1.25 as of Friday morning, just above a two-year low recently.

The Bank of England faces the unenviable task of raising interest rates in an attempt to entrench inflation expectations while avoiding pushing the economy into recession, an equilibrium that appears more difficult than ever to achieve. The bank expects GDP to fall in the last three months of this year and sees a “very sharp slowdown” ahead but not a technical recession — two consecutive quarters of contraction.

Sam Ziv, head of global FX strategy at private bank JPMorgan, told CNBC on Wednesday that although sterling is “very cheap” at the moment, investors looking to cash in the recent gains on the dollar would be better off looking at into the euro instead of the pound sterling.

“The ECB has just come out of negative rate territory and we think there are non-linear trends to do that, where the BoE is already in positive rate territory – we don’t think they can really raise all that much,” Zeff said.

“So even though we think sterling does recover a little bit against the dollar coming in towards the end of this year, we have been really short sterling in crosses, long-time commodity sensitive currencies, growth sensitive currencies, or even EURGBP. It’s It’s really not one of our favorite currencies in the G10.”

According to the CFTC’s latest data on May 10, asset managers and institutional investors held more than 128,000 short positions against the pound, compared to just 32,000 long positions.

Short selling is an investment tactic in which a speculator borrows a financial instrument or an asset, such as a stock, and sells it with the hope of buying it back later at a lower price, thus making a profit.

short sterling against the swiss franc

In a research note on Tuesday, Goldman Sachs currency strategists said that the weak performance of the British pound is the strongest persuasiveness to the Wall Street FX giant in the G10 right now.

“While the UK faces a similar trade-off as other central banks between slowing growth and inflation well above target, the Bank of England has chosen to place relatively more weight on the growth outlook while still relying on supply-side factors to achieve its goals,” said Zach Bundle, co-head of foreign exchange strategy at Goldman Sachs, inflation is down to target.

“While the merits of this approach are subject to debate, what matters to markets is that it is in fact weak currency policy. In light of the Bank of England’s divergent policy trajectory, we are once again revising our GBP/USD forecast to 1.19, 1.22 and 1.25 on 3, 6 and 12 months (from 1.22, 1.26 and 1.31 previously).

Goldman has already recommended investors to buy the EURGBP, with a target of 0.87, and this week also launched a short position on the EURCHF, with a target of 1.18 and a stop at 1.24.

Strategists expect the Swiss National Bank to take a tougher stance against inflation that exceeds its target and take steps to prevent a real depreciation of the currency.

The European Central Bank has taken a more hawkish tone in recent weeks and the market is now inclined to start raising interest rates in July, between the SNB’s June-September meetings.

“A proactive June rally, temporary rally, or balance sheet action cannot be ruled out. Given the variety of potential policy tools, we believe this trade is better in FX than rates which should be a more direct approach to policy objective,” Bandel said.

“Our main driver for this trade is to isolate the policy differential, but it is also negatively correlated with risk sentiment. We think this is appropriate, but it is also the main risk to the trade, in our view.”

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