Why Is Everyone Betting Against GBP?

The British pound continues to struggle against the US dollar, which is mainly caused by the strengthening of the greenback. Nevertheless, larger timeframes suggest that the sterling is losing ground against several other majors as well, including the euro.

The last 12 months have been painful for the GBP/USD pair. In May 2021, GBP/USD hit the highest level in 13 months at 1.4250. Since then, the quotation couldn’t see the light at the end of the tunnel, reaching a bottom at 1.2155 on May 13, which was the lowest level in a year. The price has rebounded to break above 1.2500 on Thursday, May 19, but it’s too early to speak about a trend reversal on the daily chart. That could be the case if the pair manages to at least break above resistance at 1.2640, as shown below.

Why Is GBP Weakening Vs Dollar?

To begin with, besides a bearish pound, the pair is bleeding because of a much stronger dollar. The world’s reserve currency leverages its safe-haven status amid the ongoing conflict between Russia and Ukraine, which may have a massive negative impact on the economic landscape of the entire European continent.

On top of that, the US Federal Reserve has suddenly turned more aggressive with its plans to tighten the monetary policy in an effort to put a cap on surging inflation quickly and efficiently. In March, the US Consumer Prices Index (CPI) – the leading inflation measure – jumped to 8.5% in annual terms, which was the highest in four decades. The April figure has slightly corrected, but that hasn’t diminished the concerns.

Earlier this month, the Fed unanimously raised the interest rate by 0.50% to a range of 0.75% to 1%, which was the biggest hike in more than 20 years. The central bank is about to intensify the hawkish rhetoric.

As a rule, when the central bank of a country increases the interest rate, the national currency strengthens against its counterparts, as investors are interested in holding more of it rather than spending on riskier assets.  

Pound Recovers Most Losses from Early May, but That May Not Save the Day

On May 5, GBP/USD saw the biggest daily loss since March 2020 despite the fact that the Bank of England (BoE) raised interest rates to the highest since 2009. Investors reacted to the central bank’s warning of a recession.

The Sterling tumbled over 2% versus the US dollar to touch a low of $1.2361. The British currency also plunged 1.4% against the euro.

The BoE said it expected the GDP to contract next year by 0.25%, which is a u-turn from the previous estimate of 1.25% growth. While BoE Governor Andrew Bailey said the outlook did not meet the technical definition of recession, investors still dumped the pound.

Since then, the sterling has extended the bearish trend to bottom out on May 13, but it has managed to recover the best part of previous losses. 

The GBP/USD pair has been wobbling this week north and south on mixed data as follows:

UK Unemployment to the Lowest in Almost 50 Years

On Tuesday, the pound was driven by data showing that Britain’s unemployment rate surprisingly declined in the first three months of the year to 3.7% from 3.8%, which is the lowest in 48 years. Also, companies paid bigger bonuses to attract workers. Nevertheless, when adjusted for inflation, core earnings for the majority of workers declined by the greatest since 2013. Still, total pay including bonuses surged 7.0% year-on-year, exceeding expectations of 5.4% growth.

The report released by the UK’s Office for National Statistics (ONS) prompted investors to price in a potential further rate increase from the BoE during its June meeting.

Philip Shaw, an economist at Investec, told Reuters:

We were taken aback by the strength of today’s labour market release, especially bearing in mind the fears of a downturn in the economy. Indeed it will do nothing to quell the MPC’s concerns over inflationary pressures.”

UK Inflation Surges 9% in April

While the US inflation slowed down last month, prices continue to heat up in Britain. On Wednesday, the ONS said that the CPI surged to 9% in April, driven by food and energy prices, which is slightly lower than the expected reading at 9.1%. The month-on-month figure came in at 2.5% versus the anticipated reading of 2.6%.

The 9% surge is the biggest increase since records started in 1989. The ONS estimated that it is the highest figure in about 40 years.

Following the inflation report, the pound turned negative. Even though high inflation should prompt the BoE to raise the interest rates, which is a bullish signal for the sterling, the central bank cannot rush with the hawkish rhetoric as it may cause further damage to the economy. It is forced to find the ideal balance, which is quite difficult with the surging inflation on the one side and the potential to lead to a recession on the other side.

UK Retail Sales Surprised to the Upside

On Friday, May 20, the pound extended the recovery that took off the previous day. The ONS said that British retail sales had surprisingly surged last month, as retailers increased sales of alcohol and tobacco. The indicator rose 1.4% in monthly terms, after a 1.2% decline in March.

Still, the general trend is not encouraging, as retail sales in the three months to April declined 0.3%.

Separately, the consumer confidence provided by GfK showed that households had become more pessimistic, with the indicator declining to the lowest since records began in 1974. The report had capped GBP’s recovery. 

Recovery Short-Lived, with Most Investors Betting Against Pound

Despite the solid jobs report and the surging retail sales data, the sterling will likely continue to lose ground versus the US dollar in the long term, with many investors turning more bearish.

The cost of living crisis caused by surging inflation becomes more worrying, and traders are increasing their short positions. Earlier this week, BoE Governor Andrew Bailey had warned of an “apocalyptic” outlook for consumers, citing the recent survey showing that about 25% of Britons had resorted to skipping meals.

The BoE is in a difficult position to raise interest rates in an effort to stop crazy inflation while avoiding recession, which, according to increasingly more economists, is guaranteed anyway.

Wouter Sturkenboom of Northern Trust Asset Management told Reuters:

The chance of a UK recession is all but guaranteed as there are just too many headwinds facing the economy.”

Sam Zief, head of global FX strategy at JPMorgan Private Bank, told CNBC that although the pound was “awfully cheap”, investors looking to lock in recent gains on the USD would be better off looking at euros than pounds. He stated:

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.”

He added:

So even though we do think sterling recovers a bit against the dollar come the end of this year, we have really been trading sterling short on the crosses, so long commodity-sensitive currencies, growth-sensitive currencies or even the euro against sterling. It’s really not one of our favorite currencies in the G10.”

The latest data from the Commodity Futures Trading Commission (CFTC) shows that institutional investors held over 128,000 short positions against the sterling, against only 32,000 long positions.

While the BoE might rush the inertest rate hikes, some economists expect that rate cuts will become inevitable again. HSBC strategists anticipate interest rates to peak in June next year at 2.5%, and then rate cuts will follow. All in all, the long-term outlook is not encouraging for the pound, and it remains to be seen what the BoE can do.


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