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Bargain Hunting For Pound Buyers, Hedge Funds Position For Truss Victory

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Foreign exchange analysts at MUFG look at the potential rational and justification for hedge funds increasing their long Sterling position to a 4-year high.

Although expectations of a tax boost after a Truss victory is likely to been a factor, the bank considers that risk conditions will be crucial with further gains in global equities a requisite for Pound to Dollar (GBP/USD) exchange rate gains.

The implication is that GBP/USD will be vulnerable to fresh selling if risk appetite deteriorates.

Hedge Funds Pile into Long Sterling Positions

MUFG notes that there has been a significant shift in market positioning with a large increase in long positions held by funds.

It notes that long positions held by leveraged funds GBP jumped to just over 32,500 contracts in the latest week, the largest net long position since the extreme period of volatility immediately following the covid pandemic market turmoil in March 2020.

It adds; “If you exclude that brief period when positioning was larger, this is the largest long position since April 2018.”

MUFG considers which factors are boosting demand for the Pound. It considers that a substantial amount of bad news has been priced in which may have led to bargain hunting.

It also notes that markets are looking for further BoE rate hikes, but considers that there is an additional dimension to Sterling demand.

bannerAccording to the bank, increased appetite for the Pound is related to hedge fund positioning for Truss victory in the Conservative Party leadership election.

It notes; “The policies of both candidates indicate further fiscal support is coming but Liz Truss’ but Truss’ broader tax cuts are substantial (worth GBP 30bn a year) and are likely being viewed by investors as more clear-cut bullish for growth.”

MUFG also notes that overall risk appetite has strengthened this month with a 15% rebound in global equities.

Sterling moves remain correlated with moved in global risk appetite and stronger risk conditions have increased speculation that GBP/USD is undervalued at current levels.

MUFG adds; “In our view this is key. If broader risk appetite remains favourable, the turn to more positive GBP sentiment could persist.”

UK Yields Unlikely to Increase Further

MUFG notes that UK yields moved higher following this week’s labour-market data with a particular focus on the stronger increase in wages.

The bank is doubtful that there will be a further increase in yields despite the higher than expected CPI inflation data

It adds; “Yields might not jump much further over the very short-term given the employment data yesterday fuelled a notable jump.”

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