(Bloomberg) -- Investors now hold more short than long positions in the pound following a new government budget that’s triggering a selloff across UK assets, according to Barclays Plc.
A handful of hedge funds and asset managers are adding to short positions in the pound in reaction to Wednesday’s fiscal plan, said Mimi Rushton, global head of currency distribution at Barclays. Exposure is fairly light, given the proximity to the US election, she added.
“People are happy if they went short before the budget to keep that on,” Rushton said. “At the margin, we’ve seen people selling pounds.”
The Labour Party’s first big test since coming to power in July unsettled markets, sparking a selloff in government bonds that spread to shares and the pound as investors reacted to a budget that will ramp up borrowing and risk reigniting inflation.
The pound traded little changed on Friday, hovering around its lowest level since August against the US dollar. The currency is headed for its fifth straight week of decline, the longest losing streak since 2018.
The Debt Management Office announced £297 billion ($386 billion) of government bond sales in the fiscal year, topping the £293 billion estimate from 16 bond dealers in a Bloomberg survey.
“Given there is now less wiggle room from a debt perspective going forward, that needs to be repriced and the market will remain conscious of sentiment,” Rushton said.
Asset managers flipped to a net short in the UK currency while leveraged funds lowered their net long, in the week ending Oct. 22, according to the latest Commodity Futures Trading Commission data. Speculative traders remained net long the pound.
Rushton adds the rationale for sterling strength versus the euro is still in place, given the interest rate differentials.
Traders now see fewer interest rate cuts by the Bank of England. Swaps pricing implies three quarter-point cuts and a 60% chance of a fourth by December 2025. This time last week, markets were pricing in five cuts in the period.
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