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GBP short interest: Futures funds bet against ‘utterly irresponsible’ UK to add to pressure on sterling

By Daniela Ešnerová

12:00, 28 September 2022

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Illustration of pound's market moves
The British pound, IMF and the former US Treasury Secretary were all alarmed by the UK’s economic policies revealed last week. – Photo: ShutterStock

Sterling's fall to new multi-decade low has been bad news for most of the country, but short-sellers appear to have been among the few winners.

Hedge funds have been betting against sterling - and other major currencies - for a while now, but they wildly rushed to ramp up their short positions against the pound around the time Liz Truss became the UK's new Prime Minister. 

Leveraged funds’ short bets in sterling made the highest two-week jump since 2013 at the beginning of September, according to analysis by Vanda Research of data from the Commodity Futures Trading Commission. 

GBP to US Dollar (GBP/USD) price chart

Short contracts of GBP/USD jumped 17 percentage points in the first two weeks of September, the research revealed.

On 5 September, Truss won a Conservative party leadership race, and she became PM the following day. 

On Monday, 26 September, the pound fell to a fresh low against the dollar after Truss’ chancellor, Kwasi Kwarteng, announced a set of tax cuts and spending increases in hopes of reviving the UK’s economy.

The measures inspired a collapse in the pound, and also rare criticism from the International Monetary Fund (IMF) on Wednesday. 

“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture,” IMF said in a statement.

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USD/JPY

137.70 Price
-0.670% 1D Chg, %
Long position overnight fee 0.0015%
Short position overnight fee -0.0042%
Overnight fee time 22:00 (UTC)
Spread 0.008

EUR/USD

1.04 Price
+0.910% 1D Chg, %
Long position overnight fee -0.0028%
Short position overnight fee 0.0008%
Overnight fee time 22:00 (UTC)
Spread 0.00006

AUD/USD

0.68 Price
+1.640% 1D Chg, %
Long position overnight fee -0.0017%
Short position overnight fee 0.0002%
Overnight fee time 22:00 (UTC)
Spread 0.00006

GBP/JPY

166.34 Price
+0.360% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.031

 

“Utterly irresponsible policies”

The Fund added that it was monitoring the situation in the UK, and recommended Kwarteng to re-evaluate his policies. 

Many market watchers echoed the sentiment. A former US Treasury secretary Lawrence Summers did not mince his words when he called the policies “utterly irresponsible” in a Twitter thread on Tuesday.

“I was very pessimistic about the consequences of utterly irresponsible UK policy on Friday. But, I did not expect markets to get so bad so fast. A strong tendency for long rates to go up as the currency goes down is a hallmark of situations where credibility has been lost,” he wrote.

Further volatility was seen in GBP forex crosses on Wednesday after the Bank of England announced termporary purchases of long-dated UK bonds.

"The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome," the Bank said in a statement on its website.

Markets reacted violently, with sterling initially recovering losses to stand around 1% higher on the day, before going back into reverse. By early afternoon in London, GBP/USD was down 1.4% lower at a fresh 37-year low of $1.0581. On Monday, the pound briefly fell to an all-time low of $1.0356.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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