Pound Nears Multi-Year Highs as Traders Turn Bullish on Currency

The British pound is approaching its highest levels in years against major currencies, driven by increasing trader confidence that the Bank of England (BOE) will maintain higher interest rates for longer than other central banks.

The pound is nearing a 16-year high against the Japanese yen and is close to its strongest point against the euro since August 2022. It is also just 1% away from reaching a 10-month high versus the US dollar.

According to the latest data from the Commodity Futures Trading Commission, hedge funds and other leveraged investors turned bullish on the pound in the week ending last Tuesday. This is a significant shift from just two weeks earlier when these accounts were most bearish on the currency since December 2021. Speculative traders also flipped to a positive stance on the pound for the first time this month.

Investors are betting on a stronger pound based on the expectation that UK interest rates will remain higher compared to most other G-10 countries, with the BOE likely to be slower in easing monetary policy. This belief has reinforced the view that the pound will continue to offer an attractive carry trade, which refers to the income generated from holding higher-yielding currencies.

Derek Halpenny, head of FX research at MUFG, noted in a report that the latest positioning data showed “continued appetite for carry in a market where volatility remains exceptionally low.”

The pound is already on track for its best month against the dollar since November and has been the top-performing G-10 currency versus the greenback this year.

The recent catalyst for buying the pound has been the expectation that the BOE will refrain from cutting interest rates until after the UK election in July and may only implement one rate cut this year. Last week’s data showed UK inflation cooling slower than expected, prompting traders to push back expectations for the first rate cut until November.

In contrast, the European Central Bank is anticipated to begin cutting rates next month. ECB Governing Council member Francois Villeroy de Galhau indicated on Monday that the bank should not rule out further lowering borrowing costs in July.