Traders are lining up on the horizon to shorten the British pound with the recession

The British Union flag, also known as a Union Jack, and an American flag at ETX Capital, are a contract broker. The pound has fallen more than 8% against the dollar and the British economy is facing a sharp rise in inflation and the cost of living is attracting short-term bets from traders.

Chris Ratcliffe | Bloomberg | Getty Images

LONDON – Traders are taking an increasingly short position against the British pound as the UK’s living crisis begins to bite.

Inflation hit 9% year-on-year in April, the highest in 40 years, as food and energy prices continued to rise after the UK energy regulator raised it to 54% at the start of the month.

Bank of England Governor Andrew Bailey has warned consumers of an “apocalyptic” outlook, as a recent survey found that a quarter of Britons resorted to food avoidance.

The sterling has fallen nearly 8% against the dollar to date and has fallen below $ 1.25 as of Friday morning, slightly above its recent two-year low.

The Bank of England has faced the unexpected task of raising interest rates to anchor inflation expectations as the economy avoids a recession, a balance that seems more difficult to strike. The bank expects GDP to fall in the last three months of this year and see a “very sharp recession” ahead, but not a technical recession – two direct contractions.

Sam Jeff, head of global FX strategy at JPMorgan Private Bank, told CNBC on Wednesday that although sterling is “terribly cheap” at the moment, investors are looking to lock in recent gains in the dollar, and it would be better to look at the euro rather than the pound.

“The ECB is just coming out of the negative rate zone and we think there is non-linearity to do this, where the BOE is already in the positive rate zone – we don’t think they can really increase that much,” Jeff said.

“So while we think Sterling has recovered somewhat against the dollar by the end of this year, we are really trading on the Sterling short cross, the long commodity-sensitive currency, the growth-sensitive currency and even the euro against Sterling. It’s really one of our favorite currencies in the G10. Not one. “

Asset managers and institutional investors have more than 128,000 short positions against the pound, compared to just 32,000 long positions, according to the latest Commodity Futures Trading Commission data from May 10.

Short-selling is an investment strategy where a speculator borrows a financial instrument or asset, such as a stock, and sells it in the hope of buying it back at a lower price, resulting in a profit.

Short sterling against the Swiss franc

In a research note on Tuesday, Goldman Sachs currency strategists said that sterling low performance is the hallmark of the Wall Street giant’s powerful G-10 forex at the moment.

“Although the UK, like other major central banks, faces similar trade-offs between slower growth and well-above-target inflation, the BoE still chooses to keep a relatively large weight on the growth outlook, depending on supply-side factors. Inflation has fallen below target. Goldman Sachs Co-Head of Foreign Exchange Strategy Zach Pandel said.

“While the merits of this approach are debatable, what is important for the market is that it is actually a weak monetary policy. 1.22 and 1.25 (previously from 1.22, 1.26 and 1.31). “

Goldman has already recommended that investors move higher against the pound in the euro, targeting 8 0.87, and this week also introduced a short position in the pound against the Swiss franc, which stops at 1.18 and 1.24.

Strategists expect the Swiss National Bank to take a tougher line against inflation that has exceeded its target and take steps to prevent the devaluation of real currency.

The European Central Bank has been more aggressive in recent weeks, and now between the SNB meetings in June and September, the market is signaling to start raising interest rates in July.

“A predetermined increase in June, an intermittent increase, or a balance sheet action cannot be blown away. Given the variety of potential policy tools, we think this trade is better than the rate at FX which should be a more direct approach to policy targeting,” Pandel said. .

“Our main motivation for this trade is to bridge the policy gap, but it is also negatively related to the perception of risk. We think it is appropriate, but in our view it is also the main trade risk.”

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