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Traders are lining up to short the British pound with a recession on the horizon


British Union flag, also known as a Union Jack, and an American flag at ETX Capital, a broker of contracts-for-difference. As the British economy is facing soaring inflation, high costs of living and other challenges, the pound has dropped more than 8 percent against the dollar. Traders are taking short positions on the pound.

Bloomberg – Getty Images| Bloomberg | Getty Images

LONDON — Traders are increasingly taking short positions against the British poundThe cost of living crisis in the United Kingdom is beginning to show its ugly face.

The inflation rate was at an annual 9% in April, a 40-year highFood and energy prices continued their downward spiral following the U.K. regulator’s increase in the household electricity price cap of 54% at the beginning of the month.

Bank of EnglandAndrew Bailey, the Governor of Massachusetts has warned consumers about an “apocalyptic outlook”. A recent survey confirmed this warning. a quarter of Britons have resorted to skipping meals.

Sterling is down more than 8% against US Dollar dollarYear-to-date, the current level is just above $1.24.

It is a difficult task for the Bank of England to raise interest rates to keep inflation under control and avoid putting the economy in recession. This balance seems to be becoming more challenging. In the third quarter of 2018, GDP will likely fall by 3%, according to The Bank. “very sharp slowdown” ahead but not a technical recession — two straight quarters of contraction.

Sam Zief is the head of FX Strategy at Global. JPMorganPrivate Bank said Wednesday to CNBC that while sterling may be “awfully expensive” at the moment investors seeking to capture recent gains on dollar might find it more beneficial looking at eurosMore than pounds

“The ECB is just coming out of negative rate territory and we think there are non-linearities to doing that, where the BOE is already in positive rate territory — we don’t think they can really hike all that much further,” Zief said.

So even though sterling is expected to recover a little against the dollar at the end of the year, sterling has been traded short on crosses. We have long traded sterling against commodity-sensitive currencies and growth-sensitive currencies. The G10 doesn’t like it.

The most recent data from the Commodity Futures Trading Commission on May 10 showed that asset managers and institutional investors had more than $2.5 billion. 128,000 short positions against the pound, against just 32,000 long positions.

A short-selling strategy is where an investor borrows money or sells assets to make a profit.

Swiss franc is cheaper than short sterling

A research note was published Tuesday. Goldman SachsAccording to currency strategists, sterling underperformance represents the Wall Street giant’s strongest G-10 foreign-exchange conviction for the time.

Zach Pandl from Goldman Sachs, co-head of Foreign Exchange Strategy said: “While the U.K. has to make a trade-off between slower growth and inflation well above target, the BoE has decided to place a relative bigger weight on the outlook for growth while still depending on supply-side elements to bring inflation down below target.”

While the merits and weaknesses of this strategy are open to discussion, it’s important for markets that weak currency policies be implemented. Given the BoE’s divergent policy path, we have reduced our GBP/USD forecast by a further 0.1%, 0.2% and 0.5% in 3 to 6 months. This is compared with 1.22, 1.26 and 1.31.

Goldman has already recommended investors go long on the euro against the pound, with a target of £0.87, and this week also launched a short position on the pound against the Swiss francWith a goal of 1.18, and a stop at 1.24.

Analysts predict that the Swiss National Bank would take a tougher line against inflation than its target, and they will also take measures to avoid real currency depreciation.

In recent weeks, the European Central Bank has taken a more cautious tone and market expectations are that it will begin raising interest rates in July. This is in addition to SNB meetings taking place in September and June.

A June preemptive hike, intermeeting increase, or balance sheet action are all possible. Pandl stated that FX is better than rate which would be more directly related to policy goals, given the many possible policy options. 

Our main motive for the trade is to identify and isolate the policy differential. But it also negatively correlates with risk perception. This is our opinion, however, it also represents the main risk in the trade.