Traders line up to short the pound with a recession on the horizon
British Union Flag, also known as the Union Jack, and an American flag at ETX Capital, a contracts for difference broker. The pound has fallen more than 8% against the dollar and is attracting short bets from traders as the UK economy faces runaway inflation and a cost of living crisis.
Chris Ratcliffe | Bloomberg | Getty Images
LONDON — Traders are increasingly taking short positions against the pound as the UK’s cost of living crisis begins to bite.
Inflation hit an annual rate of 9% in April, a 40-year high, as food and energy prices continued to soar after Britain’s energy regulator raised household energy price cap by 54% at the start of the month.
Bank of England Governor Andrew Bailey has warned of a “doomsday” outlook for consumers as a recent survey also showed a quarter of Britons have resorted to skipping meals.
The pound has fallen almost 8% against the dollar since the start of the year and was just below $1.25 on Friday morning, slightly above a recent two-year low.
The Bank of England faces the unenviable task of raising interest rates in an effort to anchor inflation expectations while avoiding tipping the economy into recession, a balance that appears to be becoming increasingly more difficult to find. The Bank expects GDP to collapse in the last three months of this year and predicts a “very sharp slowdown” but not a technical recession – two consecutive quarters of contraction.
Sam Zief, head of global FX strategy at JPMorgan Private Bank, told CNBC on Wednesday that although the pound is “awfully cheap” right now, investors looking to lock in recent gains in the dollar had better watch. euros than pounds.
“The ECB has just moved out of negative rates territory and we think there are non-linearities to doing that, where the BOE is already in positive rates territory – we don’t think they can really go up even more “, Zief said. .
“So even though we think the pound is recovering a bit against the dollar at the end of this year, we’ve really been trading the pound short on the crosses, so the commodity sensitive currencies, the commodity sensitive currencies to growth or even the euro against the pound. It’s really not one of our favorite currencies in the G10.”
According to the most recent Commodity Futures Trading Commission data from May 10, asset managers and institutional investors held over 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 asset, such as a stock, and resells it in the hope of buying it back later at a lower price, thereby making a profit.
Pound sterling short against Swiss franc
In a research note Tuesday, currency strategists at Goldman Sachs said the underperformance of the pound is the Wall Street giant’s strongest G-10 currency conviction yet.
“As the UK faces a trade-off similar to other major central banks between slowing growth and inflation well above target, the BoE has opted to give a relatively larger weight to the outlook. growth while still relying on supply-side factors to bring inflation on target,” said Zach Pandl, co-head of currency strategy at Goldman Sachs.
“While the merits of this approach are debated, what matters to markets is that this is de facto weak exchange rate policy. In light of the different policy trajectory of the BoE, we are again revising our forecast for GBP/USD downwards to 1.19, 1.22 and 1.25 in 3, 6 and 12 months (vs. 1.22, 1.26 and 1.31 previously ).”
Goldman has previously advised investors to go long the euro against the pound, with a target of £0.87, and this week also launched a short position in the pound against the Swiss franc, with a target of 1, 18 and a stop at 1.24.
Strategists predict that the Swiss National Bank will take a tougher line against inflation overshooting its target and taking steps to prevent real currency depreciation.
The European Central Bank has adopted a more hawkish tone in recent weeks and is now tipped by the market to start raising interest rates in July, between the SNB meetings in June and September.
“A preemptive hike in June, a hike between meetings or action on the balance sheet cannot be ruled out. Given the variety of potential policy tools, we believe this trade is better in currencies than rates, which should be a more direct approach to the political objective,” Pandl said.
“Our main motivation 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 for the trade, to our notice.”