Currency traders have been building up short positions on the pound as they bet the Bank of England will cut the base rate before the US’s Federal Reserve (Fed).
The number of bets against sterling has reached a 16-month high, according to data from the US Commodity Futures Trading Commission.
Simultaneously, asset managers have been selling sterling at their highest rate since March last year, State Street, a top custodian bank, has said.
If the Bank of England lowers rates ahead of the Fed, sterling would be less appealing to hold than the dollar, and the downshift could see funds move from the UK.
Indeed, hopes for a rate cut in the UK this summer have been buoyed by promising inflation numbers and weaker-than-expected economic data, which have only added to sterling’s uncertain outlook.
Michael Metcalfe, head of macro strategy at State Street, said: “Everyone thought central banks would move together and now that assumption has been challenged. Investors are going underweight sterling as the UK looks on track to ease ahead of the Fed.”
The rise in short positions represented a marked change in attitudes among analysts and investors over the past few months.
In March, UK inflation was running hotter than the US and traders were betting on a higher-for-longer regime from the Bank of England as the Fed geared up for a cut.
However, strong jobs and consumer demand data in the US has put paid to many of those hopes, while in the UK, a fall in interest rates before August is now practically fully priced.
Still, as we’ve seen before, the economic backdrop could change quickly, and the bank has said it’ll take the data into account when deciding when to ease.