On Monday, the British pound remained steady against the dollar, hovering around $1.31, as investors awaited a crucial inflation report. Data released on Friday showed that speculators have
increased their bullish positions on the currency to the highest level since 2014.
During June and July, the pound experienced a surge, reaching its highest level since April 2022 at $1.3144. This rise in value can be attributed to market expectations of interest rate hikes, driven by the slow progress of British inflation, which currently stands as the highest among G7 countries, towards its target.
At present, the pound is relatively unchanged against the dollar at $1.3094.
On Wednesday, the Office for National Statistics is set to release the latest inflation data. While analysts anticipate a moderation in headline consumer prices, core inflation, which excludes volatile energy and food components, is expected to remain elevated at 7.1%.
Persistent high inflation led the Bank of England to raise its key interest rate by 50 basis points in June, and there is speculation that another 50 basis point rate hike could occur next month.
Money market traders currently estimate a 70% chance of a 50 basis point hike in August, with a 30% chance of the Bank of England opting for a smaller 25 basis point hike.
In contrast, the Federal Reserve seems to be nearing the end of its tightening cycle as inflation retreats towards 2%. Additionally, with the euro area economy showing signs of slowing down, there are doubts about how much further the European Central Bank will go in terms of tightening measures.
Jane Foley, the head of FX strategy at Rabobank, commented, "Sterling can respond positively to speculation of interest rate increases as long as the UK economy remains resilient. However, if data indicates growing risks of a severe economic downturn, the pound may be prevented from reacting positively to rate hike expectations."
Furthermore, data from the Commodity Futures Trading Commission revealed that speculators increased their net long position in the pound by $699 million to $4.693 billion during the week ending last Tuesday. This marks the largest such position since mid-2014.
When investors hold a long position in an asset, it typically indicates their expectation of its value appreciating.
Foley added, "The market has expanded these long sterling positions based on the belief that the Bank of England has more ground to cover compared to other central banks. However, due to the significant exposure, there is a risk of profit-taking on these positions if economic data begins to disappoint."
At the same time, the euro gained 0.1% against the pound, reaching its highest level in nine trading days, at 85.88 pence. Photo by MonkeyStolen234, Wikimedia commons.