EBC Markets Briefing | Sterling rally looks shaky amid excess speculative bets

Sterling was unchanged at a more than 2-year high on Friday, in moves analysts warn are underpinned by speculative interest rate bets that could unravel fast in markets.

Predictions the BOE will keep interest rates high for longer than in the US and the euro zone drove the rally but also make sterling vulnerable if monetary policy forecasts change.

It has been the best performing major currency so far. Money markets price in a further 40 bps of UK rate cuts by year-end, while the ECB is expected to ease by 65 bps over the same period.

According to a UBS analysis of futures contracts, speculative traders using borrowed funds have dominated bets that the pound will appreciate against the dollar for more than a year.

However, mainstream asset managers hold a $700 million net short position, suggesting that these longer term investors have a negative view on sterling overall.

Despite improved political stability, the new government's first Budget in October poses risks of spending cuts or tax rises that may keep Britain's high national debt under control but could hurt growth.

Sterling stayed comfortably above its ascending trend line. The pair’s volatility should be muted before the PCE inflation report, so any rally in the lull will likely stall near 1.32.

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