Hedge funds are increasingly optimistic about the UK, boosting bets for a stronger pound to the highest in nine months on hopes that the upcoming election will cement the country’s shift to more stable, centrist policies.
Hedge funds and leveraged investors are growing more optimistic about the UK, holding the largest net-long position in the pound since late September, according to weekly positioning data from the Commodity Futures Trading Commission. This confidence is driven by hopes that the upcoming election will solidify a shift to more stable, centrist policies.
The UK currency has reached its strongest level against the euro in nearly two years, a rally fueled by expectations that a widely anticipated win by Britain’s Labour party will not unsettle markets. In contrast, France’s snap election has caused bond spreads to widen and raised concerns over the country’s public finances.
Strategists at Bank of America Corp. recommend shorting the euro against the pound as a portfolio hedge before the election. Athanasios Vamvakidis, head of G-10 FX strategy at the bank, explained that this strategy is based on the belief that the UK will adhere to mainstream policies and that the British economy is showing renewed resilience.
There is also speculation that the Bank of England may delay lowering interest rates, which would benefit the pound. Markets are anticipating that the BOE might start cutting rates in August or September, later than the European Central Bank, which has already begun its easing cycle.
Over the past month, leveraged funds have increased their wagers on the pound, shifting from a net short position in mid-May. Analysts like Jones at TJM Europe expect the UK currency to continue strengthening to 0.83 in the near term.
However, some analysts are cautious. Valentin Marinov from Credit Agricole warned that the current positivity is already reflected in the pound’s price, making it vulnerable to a slide to 0.85 against the euro. Nevertheless, he believes that, in the long run, the UK currency will gain against the euro, especially given the deep concerns about France’s political and fiscal outlook.
