Investors ditch pound over rate-hike uncertainty

London

TRADERS are taking an increasingly negative view on the pound, betting that the decline that's already left the currency near its lowest this year has further to run.

Hedge funds are at their most bearish since December, while institutional investors are wagering against sterling at levels last seen more than 2 years ago, according to the latest data from the Commodity Futures Trading Commission.

The pessimism is down to a cocktail of domestic and international challenges. The pound is suffering from mounting bullishness on the dollar amid signs that the Federal Reserve will accelerate the winding down of its emergency stimulus programme.

Mixed in with that are doubts about whether the Bank of England (BOE) will raise interest rates in December, and even concern about tighter policy damaging the economic recovery.

The bearishness "may signal anxiety about the growth outlook for the UK in light of Covid and Brexit uncertainty, and given lingering concerns that a near-term rate hike could be a policy mistake", said Jane Foley, head of foreign-exchange strategy at Rabobank.

The BOE is the big near-term unknown after it surprised markets this month by leaving its benchmark rate at 0.1 per cent.

While traders now expect a hike in December instead, BOE Governor Andrew Bailey and chief economist Huw Pill have clouded the picture around that meeting in recent days, saying the decision would be finely balanced.

That's got options traders snapping up protection, with the cost of hedging swings in the pound over the coming month hovering near its highest level since March. The pound is trading around US$1.34, just above the 2021 low of US$1.3353 touched earlier this month.

It's fallen more than 5 per cent in the past 6 months, and slipped again on Monday as the dollar benefited from news of Jerome Powell's nomination to a second term as Fed chair.

And the broad direction in the view of analysts is downward. Stephen Gallo, European head of currency strategy at the Bank of Montreal, says sterling could fall as low as US$1.29 in the next 2 months, which would be a near-4 per cent drop from current levels.

"The UK is very exposed to global economic trends," he said. "There are signs that supply chain obstructions are starting to ease, but economic headwinds in general appear to have increased." BLOOMBERG