Hedge Funds Cut Bearish Pound Positions Before BOE Rate Decision

  • Pound advances before U.K. inflation data due Tuesday
  • Back-to-back short position reduction is first since Brexit

Carney: 'Absolutely Serene' on BOE Brexit Grilling

The pound rose for the first time in four days as hedge funds and other large speculators cut their bets that the currency will fall for a second week before the Bank of England’s latest policy decision.

That’s the first back-to-back reduction in so-called net short positions in sterling since Britain voted to leave the European Union in June. The U.K. currency gained versus all except one of its 16 major peers before a report Tuesday that economists forecast will show annual consumer-price inflation accelerated in August from a year ago at the fastest pace since November 2014.

JPMorgan Chase & Co. revised up its year-end forecasts for the pound against the dollar and the euro, citing a resilient growth outlook. Monetary Policy Committee members led by Governor Mark Carney will announce their decision on Sept. 15.

“We do sense a period of sterling stability, at least for now,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. in London. “U.K. economic performance after the Brexit vote is proving better than expected. On the political front, sentiment is shifting from immediate hard Brexit to a more prolonged but softer one.”

The pound rose 0.3 percent to $1.3308 as of 4:06 p.m. in London, after sliding 1.3 percent in the previous three days. It strengthened 0.4 percent to 84.34 pence per euro, having depreciated 0.9 percent last week after the European Central Bank refrained from extending its monetary stimulus.

Resilient Economy

Sterling has outperformed all of its 16 major counterparts in the past month as reports from services to construction showed the U.K. economy was holding up better than some economists predicted, marking a turnaround from when the Brexit vote and the resulting stimulus from the BOE made it the worst performer. It touched a 31-year low of $1.2798 on July 6 and is still down 11 percent versus the dollar since the June 23 referendum.

Short positions, or bets on the currency’s decline, outnumbered bullish wagers by 89,969 contracts last week, according to U.S. Commodity Futures Trading Commission data. That’s down from record 94,978 contracts in August, the most since Bloomberg started compiling the data in 1992.

JPMorgan now sees the pound at $1.32 by the end of this year from $1.28 in its previous forecast, according to a report published on Monday. The bank revised its year-end forecast for the U.K. currency versus the euro to 87 pence from 90 pence previously.

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BOE Outlook

The BOE cut its main interest rate to a record in August and resumed its bond-buying program to head off the risk of an economic slowdown after the referendum, while lowering its growth forecasts. Data since have suggested that the U.K. economy is holding up. All the analysts in separate Bloomberg surveys predict the central bank will keep its key rate and asset-purchase target unchanged on Thursday.

“The combination of Carney ruling out negative rates and better economic data has not left much room for maneuver for the market, which is not priced for much additional easing this year,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “Any signal that the MPC could be seriously looking to ease in November is set to undermine the pound this week.”

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