Parallel to GBP/USD reaching a new 1-year high above $1.30 last week, bullish bets on the British currency surged to a record high. Although sterling has experienced a slight correction, the heavy speculative positioning in GBP ahead of the Bank of England’s (BoE) rate decision next week leaves the currency vulnerable.
According to Commodity Futures Trading Commission data, non-commercial traders, including hedge funds and asset managers, increased their net long position on the pound to an all-time high last week. This positioning reflects optimism about the UK’s better-than-expected economic performance this year, relative political stability with a majority Labour government, and the currency's attractiveness to carry traders due to the BoE delaying interest rate cuts. The carry trades, based on the pound’s high yields compared to other currencies, may unwind as uncertain monetary policy and the upcoming US presidential election approach. FX volatility has been low, supporting carry trade strategies, but if investor anxiety about price swings grows, high-yielding currencies sensitive to risk sentiment, like GBP, could suffer. Indeed, with upcoming Fed and BoE meetings, the 2-week implied volatility gauge has risen to its highest in a month.
Additionally, money markets see a 40% chance of a BoE quarter-point interest rate cut in August, giving bullish GBP traders another reason to be cautious. A surprise rate cut from the BoE could sharply weaken sterling. The 200-week moving average at $1.2850 is the first key support level to watch.
