Before the release of the UK budget, Citigroup pointed out that hedge funds and asset management companies continued to sell the pound, causing it to fall significantly from a two-year high. Despite being the best-performing G10 currency this year, market confidence in the pound has decreased as traders bet on a rate cut by the Bank of England. The budget will be a test for the pound, as the Chancellor plans to reform the way debt is measured to release fiscal space. The euro is also under pressure and may see its longest consecutive decline in eight months
Citigroup Inc. stated that hedge funds and asset management companies will continue to sell the pound before the release of the UK budget next Wednesday.
The pound has sharply retreated from the multi-year high touched last month, now approaching the lowest level since mid-August. Although it remains the best-performing G10 currency so far this year, market confidence in the pound has been crumbling as traders increase bets on a rate cut by the Bank of England.
The first budget report under the Labour government will be the next test for the currency, with Chancellor of the Exchequer Rachel Reeves planning to overhaul the way UK debt is measured to unlock up to £70 billion ($91 billion) of fiscal space.
Kristjan Kasikov, Global Head of Citigroup's Foreign Exchange Quantitative Investor Solutions, said, "Our data shows that the forex market is slightly bearish on the pound ahead of the budget. Hedge funds and asset management companies have been net sellers of the pound since early September."
Hedge funds and asset management companies are selling the pound
Kasikov added that this offsets the still bullish pound futures positions, stating that the upside potential for the pound against the euro is limited.
He said, "We believe that the pound against the euro will remain range-bound in the coming months. Overall, our economic team expects the budget to not bring significant stimulus measures in the short term, with tax revenue growth potentially outpacing marginal spending growth."
The euro is also facing difficulties. The euro against the dollar is set to decline for the fourth consecutive week this week, potentially marking the longest weekly decline in eight months. Signs of weakness in the Eurozone economy are increasing the likelihood of the European Central Bank adopting a more aggressive easing policy.
With the risk of Trump's victory and the imposition of high trade tariffs on European countries, the upcoming US presidential election is also putting pressure on the euro. Goldman Sachs Group Inc. stated that this situation will boost the dollar and lead to the euro falling towards parity. The dollar is having its best month in two years.
Michael Metcalfe, Head of Macro Strategy at DWS Group, stated in an interview, "Regardless of who wins the White House, relative interest rates will favor the dollar over the euro. The gap in US-EU monetary policy will play a dominant role."
"Relative interest rates will favor the dollar over the euro, regardless of who is in the White House," said Michael Metcalfe, Head of Macro Strategy at State Street Global Markets, in an interview with Bloomberg TV. "Relative monetary policy is the dominant factor."
Traders are betting a 40% chance that the European Central Bank will cut rates by 50 basis points at its next meeting in December, a risk that was not priced in just 10 days ago At the same time, the possibility of the Fed cutting interest rates by another 50 basis points has disappeared.
The options market also indicates more pain ahead for the Euro. Demand to prevent the Euro from falling is approaching the highest level in over three months, with volatility indicators also on the rise