Investors Lift Pound Bets as Credit Agricole Sees Pullback Risks

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Investors are the most bullish on the pound since before the Brexit vote, but Credit Agricole SA sees a risk the rally has peaked.

Leveraged funds raised net pound longs to 48,051 contracts, the biggest long position since August 2015, while asset managers cut short positions to the lowest since November 2014, the latest CFTC data showed. The options market has also turned positive, with traders positioning for further gains for the first time since 2009 amid bets on dollar weakness.

“With speculative long positioning close to multi-year extremes, we advise against chasing the currency higher,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole. “There is a non-negligible risk of a pullback in cable in response to weaker U.K. data or a renewed spike in Brexit uncertainty,” he said, adding the bank’s three-month forecast is for a fall to $1.33 from $1.39 currently.

The unwinding of shorts has been an important driver of the rally in the U.K. currency since the middle of 2017, said Marinov. The fact positioning has now switched means it may take concrete evidence of a soft Brexit and an improved economic outlook to make investors bet on further sterling strength, and a downside correction could come before long, he added.

The pound rose 0.7 percent to $1.3960 as of 4:05 p.m. in London. It strengthened 0.5 percent to 87.73 pence per euro. Fourth-quarter gross domestic product data due Friday will be the next test for bulls, with growth expected to hold up from the prior three months in a first estimate.

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