(Bloomberg) -- Foreign exchange markets are positioning for further sterling weakness ahead of the UK budget on Wednesday, with both hedge funds and asset managers continuing to sell the currency, according to Citigroup Inc.
The pound is currently trading near to its lowest level since mid-August, after tumbling from the highest in more than two years touched last month. While it’s still the best performing currency against the dollar year-to-date, the market’s confidence in the pound has been crumbling, after traders increased bets on Bank of England interest-rate cuts.
The first Labour Party budget since coming to power will be the currency’s next test, with Chancellor of the Exchequer Rachel Reeves planning to overhaul the way the UK measures its debt to free up as much as £70 billion ($91 billion) in fiscal headroom.
“Our data suggests the FX market is positioned slightly bearish sterling ahead of the budget,” said Kristjan Kasikov, global head of foreign exchane quantitative investor solutions at Citi. “Both hedge funds and asset managers have been net sterling sellers since the start of September.”
Kasikov added that this is outweighing still-bullish sterling positioning in futures and said the bank sees limited potential for gains in the pound against the euro.
“We think sterling will remain range bound against the euro in the coming months,” he said. “On balance, our Economics team expect no significant near-term stimulus from the budget with tax increases likely exceeding marginal increases in spending.”
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