Bets are bearish for sterling as UK rate cut likely this week

Speculators that are the most bearish on sterling in nearly 25 years may be vindicated by yesterday’s survey showing Brexit is probably hitting Britain harder than markets previously envisaged.

Sterling declined against most of its 16 major peers as the data showed UK manufacturing shrank more than initially forecast in July. 

Hedge funds and other large speculators ran the biggest net short positions, or bets on the currency’s decline, since records began amid speculation that the Bank of England will cut interest rates for the first time in more than seven years this Thursday to head off the risk of recession.

Sterling weakened to 84.54 pence against the euro yesterday. It has fallen 11% against the dollar since the June 23 vote. 

Short positions outnumbered bullish wagers by 80,572 contracts last week, according to US Commodity Futures Trading Commission data.

“Brexit could still play out as the perfect storm for the pound,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole’s corporate and investment-banking unit in London. 

“Some people are bearish because it could trigger a balance of payments crisis which could see the currency depreciating sharply further on the back of portfolio outflows,” he said.

All but two of 51 economists in a Bloomberg survey forecast Bank of England policymakers led by governor Mark Carney will cut the key interest rate from a record-low 0.5%, where it’s been since March 2009.

The UK vote to leave the EU, along with recent economic data that underscored the ensuing setback to consumer confidence and business activity, have boosted speculation that the Bank of England will ease monetary policy this month.

Monday’s manufacturing output report “is clearly a source of concern,” said Ned Rumpeltin, the London-based European head of foreign-exchange strategy at Toronto Dominion Bank. 

“It sets the stage for the Bank of England later this week, solidifying expectations of a rate cut. We continue to look for considerable downside risks for the pound from here,” he said.


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