Investment Insights – As the Bank of Japan said it was in no rush to raise interest rates and the Bank of England was in no rush to cut interest rates, the change in interest rate bets made long yen trading less attractive, and investors turned their attention to bullish sterling. Recently, the pound has surged to a 30-month high since March 2022, and Goldman Sachs is optimistic that the pound will rise to 1.40.
As of writing (September 25), the pound-to-dollar (GBP/USD) exchange rate was at 1.3394, with an increase of 5.18% so far in 2024 and an increase of 5.60% in the past three months.The pound has recently risen to a two-and-a-half-year high against the U.S. dollar, the pound against the euro has hit a two-year high of 1.20, and the pound against the yuan has risen to a more than eight-year high.
[British pound to dollar exchange rate, source: Investing.com]
According to Bloomberg data, on Monday (23rd) the Depository Trust and Clearing CorporationGBP/EUR options trading volume rose to around 300% above the five-day average, having once again exceeded average levels on Tuesday.
Interest in sterling has been boosted by changes in interest rate bets.The Bank of England has recently stated that it is in no rush to cut interest rates, while bets on further interest rate cuts by the Federal Reserve and the European Central Bank this year are still very hot.
Bank of England Governor Bailey said on Tuesday that British interest rates were unlikely to fall back to ultra-low levels without another financial crisis and an economic crisis on the scale of the new coronavirus epidemic. He reiterated that monetary easing will continue “gradually.”
Some analysts said Bailey’s remarks showed that the Bank of England believes that the neutral interest rate (a theoretical interest rate that neither stimulates nor suppresses the economy) is significantly higher than the historical lows in recent years. Although the Bank of England cut interest rates by 25 basis points in August, kicking off the bank’s rate-cutting cycle, policymakers have been cautious about signaling to investors where they expect rates to settle.
Yen trade cools, pound trade rises
Ruchir Sharma, global head of FX options trading at Nomura Holdings in London, said, “Increasingly, we are seeing clients no longer focus on the dollar. “He said that the appreciation of the pound against the US dollar and the pound against the Swiss franc is currently one of the most popular trading concepts.
On Tuesday, the pound rose to its highest level against the dollar since April 2022 and the pound hit an eight-week high against the Swiss franc, although both currency pairs later gave up some of their gains.
Buying sterling against other currencies has begun to replace long yen trades that were once popular among hedge funds.Earlier, Bank of Japan Governor Kazuo Ueda said the central bank was in no rush to raise interest rates.
Some traders thinkKazuo Ueda’s cautious comments drive leveraged funds to cut cash, options positionsthese positions would have benefited when the yen strengthened, while the weekly yen exchange rate fell back from the 140 level to the current level of around 144 points in the past week.
Eiji Kitada, an economist at Hamagin Research Institute, speculated that Kazuo Ueda appeared to be trying to become more cautious and clear in communication after the Bank of Japan was heavily criticized for its lack of communication about a July interest rate hike.
Regarding the pound, Ray Attrill, head of foreign exchange strategy at National Australia Bank in Sydney, said, “With the Bank of England lagging behind the easing cycle of developed world central banks and incoming UK data largely holding up pretty well, it makes sense to express a bearish view on the dollar or euro through sterling, at least on a relative basis.」
The U.S. consumer confidence index deteriorated sharply in September, with current market expectations for a 50 basis point interest rate cut in November exceeding 25 basis points; disappointing Eurozone PMI data also caused traders to increase their bets on an interest rate cut by the European Central Bank in October. The ever-expanding Interest rate differentials will increase the attractiveness of sterling to investors.
Goldman Sachs updated its foreign exchange outlook this week, optimistically predicting that the pound to dollar exchange rate will rise to 1.40 within 12 months.
However, Attrill warned that the pound was approaching “overbought levels”, which could limit short-term gains.
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