8/14/2019 Sterling bets Vince Stanzione

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Traders build up record bets against sterling

Sterling fell to a 10-month low below $1.50 against the dollar on Monday as figures revealedspeculators had built up record bets against the pound and concerns grew over the UKs recordbudget deficit.

Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity,showed investors raised their short positions in sterling to 62,884 contracts, worth $6.1bn, in the weekto February 23. This was up from 56,079 in the previous week.

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The extension of bets against the pound, which exceeded their previous peak in October, came amidincreasing uncertainty over the Bank of Englands asset purchase plan and the possibility of furtherquantitative easing in the UK.

Gareth Berry at UBS said Bank of England officials had repeatedly emphasised that more QEremained an option, without indicating how soon the programme may be revived, if at all.

Furthermore, he said QE extensions had previously been considered on a quarterly basis in tandemwith the preparation of the Banks quarterly inflation report.

It now appears that decisions on QE will be taken at every policy meeting, leading to a heightenedstate of market uncertainty about the likely timing, said Mr Berry. We maintain our three-month

forecast for sterling against the dollar of $1.48.

Also weighing on sterling were opinion polls over theweekend that showed the Labour Party was on courseto win the upcoming general election, widely expectedin May.

Polls showed the lead of the UKs oppositionConservative party had slipped to just two points,which, given Britains electoral system, would mean theLabour party would be able to form a minoritygovernment.

The pound dropped to fresh lows as traders reasonedthat such a result would lessen the likelihood that the UKs record fiscal deficit would be reined in.

Lee Hardman at Bank of Tokyo-Mitsubishi UFJ said with the balance of risks now shifting in favour ofthe formation of a minority Labour government, he had become even more bearish over the near-termprospects for the pound.

He said a Labour victory would further damage the fiscal credibility of the UK at a crucial juncture,given the partys reputation for loose fiscal policy.

So far the Labour government has a commitment to half the budget deficit over the next five years

but has no credible plan, said Mr Hardman.

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Accordingly, we have lowered our target for sterling further, anticipating a fall towards $1.40 againstthe dollar while maintaining the euro will rise towards 0.95 against the pound over the next three tosix months.

The pound dropped 1.2 per cent to a low of $1.4976, its weakest level since May 8, and dropped 1per cent to a three-month trough of 0.9073 against the euro. Sterlings price against gold hit a record

high above 738.

The announcement that the UKs Prudential was buying US insurer AIGs Asia arm for $35bn, $25bnof which will be in cash, also put pressure on the pound.

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