Hedge funds have significantly reduced their positions in British Pounds (GBP) due to concerns about Britain’s budget situation and declining demand for government bonds known as Gilts.
According to UBS’s FX Flow Monitor, hedge funds have sold an amount of GBP 3.1 standard deviation above the norm over the past two weeks, marking the most substantial flows since November.
Historical patterns indicate that the GBP against the US dollar () often experiences a small rebound after such intense selling pressure. Data from the past five years indicates an average recovery of 0.6% in the nine days following comparable selling events by hedge funds.
However, this trend does not seem to last long as GBP/USD typically begins to fall again, with an average decline of 1.4% from the ninth to the fifteenth day after the selling peak.
UBS analysts also had a bearish view on the GBP, citing structural problems in Britain’s financial markets. The upcoming auctions for 30-year inflation-linked bonds (Linkers) and 10-year government bonds could further test investor confidence if demand remains low.
In addition, the publication of the British Consumer Price Index (CPI) is in the offing for December. Softer inflation could pave the way for a 25 basis point rate cut by the Bank of England in February, potentially offering some reprieve to UK yields.
However, such a rate cut would not strengthen the GBP as it would reduce the currency’s interest rate differential benefit. From a valuation perspective, UBS’s regression-based model indicates that the euro is still relatively cheap against the British pound (), with a z-score of 2.5.
UBS suggests that selling GBP in favor of the euro could be a strategic move to sidestep the potential recovery of GBP/USD in the near term.
This article was produced with the support of AI and reviewed by an editor. For more information see our General Terms and Conditions.
