Hedge funds have slashed their bets against the British pound to the lowest level since the Brexit vote in June last year, after the currency enjoyed its best month against the dollar in two years.
The pared-back “short” bets, which would profit on a drop in the pound, followed Theresa May’s decision to call snap elections in June, a move that investors said would allow the ruling Conservative party to consolidate power and helped sterling recover its footing.
The pound has climbed more than 3 per cent against the US dollar and 5 per cent against the Japanese yen since the general election was called last week.
The UK currency has rallied 3.2 per cent versus the dollar in April, its best monthly performance since April 2015 and making it the biggest gainer of all major currencies over the past month.
Leveraged funds, a proxy for hedge funds, reduced their short positions on the pound to 19,287 contracts in the week to April 25, according to data from the Commodity Futures Trading Commission released on Friday. That is half the level of the week before and down 79 per cent from a November high.
“[The pound] will face Brexit challenges but, in our view, its day of reckoning has been pushed further into the future,” Kamal Sharma, a Bank of America Merrill Lynch analyst, said in a note. “For now, this leaves investors to focus on the traditional drivers for sterling.”
Nonetheless, the CFTC report predates data released on Friday that the UK’s growth rate more than halved in the first three months of 2017, sparking concerns that the process of leaving the European Union is only now beginning to drag on the economy.
Standard & Poor’s, the rating agency, on Friday also confirmed its negative outlook on the UK’s credit rating, and warned that “Brexit continues to present a significant risk to the UK’s track record of strong economic performance”.
As a result of the two-year Brexit process, which will probably force the Bank of England to continue to keep monetary policy easy, many strategists are sceptical that the pound can rally much further. Analysts polled by Bloomberg on average expect sterling to trade at 1.29 against the US dollar in 2018, roughly where it is now.
”The pound’s bullish days could be numbered, especially against currencies where the central bank is more hawkish than the Bank of England,” Fawad Razaqzada, an analyst at Forex.com, said in a note.
“You can’t argue with the market regardless of my fundamental views. I will therefore put my bearish views on the back burner until price shows a clear reversal sign. But I do feel we are nearing the turning point,” he added.