GBP short interest: Futures funds bet against ‘utterly irresponsible’ UK to add to pressure on sterling
12:00, 28 September 2022
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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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“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.
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.
— Lawrence H. Summers (@LHSummers) September 27, 2022
A strong tendency for long rates to go up as the currency goes down is a hallmark of situations where credibility has been lost.
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