Traders increasingly short ‘awfully cheap’ Pound as inflation and cost-of-living crisis drive UK towards hard recession
Traders are increasingly taking short positions against the Pound Sterling as the economic outlook for Britain deteriorates.
Institutional investors, asset managers and other key players in the US, the world’s largest financial market, currently hold more than 128,000 short positions against the Pound, compared to just 32,000 long positions, according to the most recent figures from the Commodity Futures Trading Commission.
Short-selling is the tactic where a speculative investors borrows a financial asset and offloads it with the expectation he will be able to buy it back later at a lower price or rate.
Sterling has dropped by more than 7 per cent against the US dollar year-to-date and is currently balancing around $1.36 this morning, having slightly recovered after a two year low.
Primary drivers are the raging cost of living crisis across the UK, paired – or fuelled by – with rising inflation, recently hitting 9 per cent, the highest in four decades.
Moreover, the Bank of England recently warned for an “apocalyptic” outlook for UK consumers.
Sterling is currently “awfully cheap”, according to Sam Zief, head of global forex strategy at JPMorgan, telling CNBC News that, despite the pound being so cheap, investors should look at the euro instead, primarily of recent monetary decisions.
“The ECB is just coming out of negative rate territory and we think there are non-linearities to doing that, where the BoE is already in positive rate territory — we don’t think they can really hike all that much further,” Zief explained to the channel.
“So even though we do think sterling recovers a bit against the dollar come the end of this year, we have really been trading sterling short on the crosses, so long commodity-sensitive currencies, growth-sensitive currencies or even the euro against sterling. It’s really not one of our favorite currencies in the G10,” he added.
Goldman Sachs wrote in a note last week that the Pound’s “underperformance” has prompted the bank to recommend to its investors to go long on the Euro, versus the Pound.
Moreover, it now also launched a short position on the Pound against the Swiss France.
Goldman Sachs co-head of foreign exchange strategy Zach Pandl said that “while the UK faces a similar trade-off as other major central banks between slowing growth and well-above-target inflation, the Bank of England has chosen to place a relatively bigger weight on the growth outlook while still relying on supply-side factors to bring inflation down to target,”
He added that: “While the merits of this approach are subject to debate, what matters for markets is that it is de facto a weak currency policy. In light of the BoE’s differing policy trajectory, we are again revising down our forecast for GBP/USD to 1.19, 1.22 and 1.25 in 3, 6 and 12 months, from 1.22, 1.26 and 1.31 previously.”
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