On May 15, hedge funds were the most bearish on the pound since December 2021, which strategists said was due to fears of a British recession.
Data from the Commodity Futures Trading Commission (CFTC) showed that leveraged investors switched to a net short position of 6,858 contracts in the week to May 9 after being long for three consecutive weeks.
The International Monetary Fund (IMF) has previously warned that the UK is the only G-7 country that could experience a recession this year.
“There is growing concern that fighting inflation will come at the expense of the economy,” said Rodrigo Catril, a strategist at National Australia Bank in Sydney. “Sterling has done well before, so profit-taking is also attractive.”
Sterling’s top performance among G-10 currencies this year could be tested on signs the Bank of England is preparing to pause its tightening cycle.
If the pound weakens, bullish bets by Goldman Sachs and Jefferies LLC , which predict further gains against currencies such as the euro given persistently high inflation in the UK, will be threatened.