Traders bet against sterling in belief BoE will cut rates by summer

Financial Times

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Investors have been building up bets against the pound, as conviction grows that the Bank of England will start cutting interest rates by the summer, ahead of its US counterpart.

Currency speculators’ wagers on a fall in sterling have reached a 16-month high, data from the US Commodity Futures Trading Commission shows. Meanwhile, asset managers have turned the most bearish on the UK currency since March last year, according to State Street, one of the world’s largest custodian banks.

The shift in positioning, driven by falling UK inflation and weak economic data, has helped push the pound down 1.5 per cent against the dollar this year. Investors now expect the BoE, which announces its latest rate decision on Thursday, to cut earlier and faster than the Federal Reserve.

“Everyone thought central banks would move together and now that assumption has been challenged,” said Michael Metcalfe, head of macro strategy at State Street. “Investors are going underweight sterling as the UK looks on track to ease ahead of the Fed.”

As recently as March, when data still showed UK inflation running ahead of the US, investors had clung on to bets that the Fed would cut rates ahead of the BoE.

But stronger than expected US economic data has left traders pricing in the probability of a Fed rate cut by late July at only one-third, compared with a near-50 per cent chance of a BoE cut by June. A drop in UK interest rates by August 1 is almost fully priced in by markets.

The change in expectations has come as US headline inflation rose to a higher than expected 3.5 per cent in March from 3.1 per cent in January. Over the same period, UK inflation dipped from 4 per cent to 3.2 per cent, twice undershooting expectations this year.

Traders are betting the BoE will deliver at least two quarter point rate cuts by the end of the year. That compares with just one or two cuts priced in for the Fed, even after weak US labour figures on Friday helped ease investors’ concerns about consumer price rises.

“Inflation hasn’t met the Fed’s target and doesn’t look like it will any time soon, so the Fed is on hold,” said Roger Hallam, global head of rates at Vanguard, adding that, in spite of last week’s jobs figures, economic data

The full article is available here. This article was published at FT Markets.