Investors Ditch the Pound as BOE Fuels Rate-Hike Uncertainty

(Bloomberg) -- 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 two 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 program. Mixed in with that are doubts about whether the Bank of England 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 U.K. 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%. 

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 $1.34, just above the 2021 low of $1.3353 touched earlier this month.

It’s fallen more than 5% in the past six 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 $1.29 in the next two months, which would be a near-4% drop from current levels. 

“The U.K. 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.”

It’s not all doom and gloom. Bearishness among options traders for the next three months has eased somewhat since earlier in November, according to risk reversals, a gauge of market positioning and sentiment. Strategists at Bank of America, Rabobank and Societe Generale SA all see the currency ending the year little changed at $1.34.

Yet Canadian Imperial Bank of Commerce downgraded its year-end forecast to $1.33 from $1.38 several weeks ago due to dollar strength and uncertainty around the BOE, said Jeremy Stretch, its head of G-10 foreign-exchange strategy. 

Nomura International Plc is making the same prediction, according to strategist Jordan Rochester. 

©2021 Bloomberg L.P.