A woman exchanges English Pound notes at a money exchange office in the British overseas territory of Gibraltar, June 24, 2016.
A woman exchanges English Pound notes at a money exchange office in the British overseas territory of Gibraltar, June 24, 2016. Reuters / Jon Nazca

Evidence is rapidly mounting that Britain's cost of living crisis is starting to bite, and hedge funds are in prime position to cash in on sterling's equally rapid slide against the dollar.

U.S. futures market data show that funds have amassed their biggest wager against the pound since October 2019, a bet now worth close to $5 billion.

The speed with which speculators have turned against the pound has been remarkable. Just before Russia's Feb. 24 invasion of Ukraine, Commodity Futures Trading Commission data showed that funds held a small net long sterling position, and the pound was trading close to $1.36.

Nine weeks later and funds are net short sterling to the tune of 58,914 contracts - an aggregate bet worth $4.785 billion - both the largest bets against the pound in two and a half years.

"Cable" has crashed through $1.30 support to $1.27, a low not seen since October 2020. That's a decline of nearly 7% in just nine weeks. The fall has been rapid, but traders will have $1.25 in their sights.

A short position is essentially a bet that an asset's price will fall, and a long position is a bet it will rise.

Kit Juckes at Societe Generale reckons any interest rate appeal the pound has could quickly evaporate. He predicts the Bank of England won't raise rates a further 150 basis points by the end of this year, as money markets are still projecting, because the economy will not be able to take it.

"The UK consumer has seen real incomes hit hard by some huge price increases, most notably in utility bills, and is retreating," Juckes wrote on Friday.


The rapid deterioration in sterling sentiment reflects the rapid deterioration in the UK economy.

Almost a quarter of people in Britain say it is harder to pay household bills, and over 40% say they will be unable to save over the next 12 months, according to an official survey on Monday. And that was carried out before increases in regulated energy prices took effect.

Retail sales volumes slid by an unexpectedly hefty 1.4% in March from February, and market research firm GfK said consumer confidence slumped this month to close to its lowest level since records began nearly 50 years ago.

The International Monetary Fund last week said it expects UK economic growth to be the weakest of all major economies next year with the exception of Russia, and UK inflation to be the highest in the G7.

As Rabobank's Jane Foley notes, this poses a "challenge" for the BoE, adding: "Buying interest in the pound could evaporate quickly if recession fears build."

If the economic outlook for sterling appears bleak, the political outlook is only making it darker as pressure intensifies on Prime Minister Boris Johnson to resign.

Lawmakers have triggered an investigation into whether he misled parliament on breaking lockdown rules during the COVID-19 pandemic, and calls on him to quit are growing.

This came after Johnson recently became the first sitting prime minister to be sanctioned by police for breaking the law.

Related columns:

Hedge funds' bullish dollar view distorted by yen outlier (Reuters, April 18) [L5N2WH05E]

Euro FX reserve demand returns after years of neglect (Reuters, April 13)

(The opinions expressed here are those of the author, a columnist for Reuters)

(By Jamie McGeever; Editing by Hugh Lawson)