Manufacturing enjoys rebound as weak sterling helps exports
Sterling fell to a 10-month low below $1.50 against the dollar on Monday as figures revealed speculators had built up record bets against the pound and concerns grew over the UK’s record budget 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 week to February 23. This was up from 56,079 in the previous week.
The extension of bets against the pound, which exceeded their previous peak in October, came amid increasing uncertainty over the Bank of England’s asset purchase plan and the possibility of further quantitative easing in the UK.
Gareth Berry at UBS said Bank of England officials had repeatedly emphasised that more QE remained 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 tandem with the preparation of the Bank’s quarterly inflation report.
“It now appears that decisions on QE will be taken at every policy meeting, leading to a heightened state 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 the weekend that showed the Labour Party was on course to win the upcoming general election, widely expected in May.
Polls showed the lead of the UK’s opposition Conservative party had slipped to just two points, which, given Britain’s electoral system, would mean the Labour party would be able to form a minority government.
The pound dropped to fresh lows as traders reasoned that such a result would lessen the likelihood that the UK’s 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 of the formation of a minority Labour government, he had become even more bearish over the near-term prospects for the pound.
He said a Labour victory would further damage the fiscal credibility of the UK at a crucial juncture, given the party’s 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.
“Accordingly, we have lowered our target for sterling further, anticipating a fall towards $1.40 against the dollar while maintaining the euro will rise towards £0.95 against the pound over the next three to six months.”
The pound dropped 1.2 per cent to a low of $1.4976, its weakest level since May 8, and dropped 1 per cent to a three-month trough of £0.9073 against the euro. Sterling’s price against gold hit a record high above £738.
The announcement that the UK’s Prudential was buying US insurer AIG’s Asia arm for $35bn, $25bn of which will be in cash, also put pressure on the pound.
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