Hedge Funds Bullish on the UK With Post-Election Calm in Sight

(Bloomberg) -- Hedge funds are increasingly optimistic about the UK, boosting bets for a stronger pound to the highest in nine months on hopes that the upcoming election will cement the country’s shift to more stable, centrist policies.

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Leveraged investors and hedge funds hold the biggest net-long position in the pound since late September, according to weekly positioning data from the Commodity Futures Trading Commission.

They’re riding a rally in the UK currency that’s taken it to the strongest level against the euro in nearly two years. The pair has come into focus as upcoming elections in the UK and France underscore how a widely expected win by Britain’s Labour party is unlikely to rattle markets, while France’s snap election has widened bond spreads and fueled concern over the country’s bloated public finances.

“GBP sentiment is positive and trending,” said Neil Jones, senior foreign-exchange salesperson to financial institutions at TJM Europe. “The market is sensing relative fiscal responsibility in the UK versus France and other EU nations.”

At Bank of America Corp., strategists are recommending investors short the euro against the pound as a portfolio hedge before the election. Part of the belief underpinning the trade is faith that the UK will stick to “mainstream policies” and the British economy is showing renewed resilience, said Athanasios Vamvakidis, head of G-10 FX strategy at the bank.

It’s also possible that the Bank of England may wait longer to lower interest rates, another benefit for the currency, he added. Markets are pricing in the possibility that the BOE may start cutting rates in August or September, lagging the European Central Bank, which has already begun its easing cycle.

Leveraged funds are increased their wagers on the pound over the past month, shifting from a net short position in mid-May. Jones at TJM Europe expects the UK currency will continue to strengthen to 0.83 in the near term.

Others are less convinced. Credit Agricole’s Valentin Marinov warned that much of the positivity is already reflected in the pound’s price, meaning it could be vulnerable to a slide to 0.85 against the euro. However, in the long run, he believes that the UK currency will gain against the euro, especially given the deep concerns about France’s political and fiscal outlook.

“The pound is one of the significant market longs at the moment and we could see some profit taking in the wake of the election,” he said.

--With assistance from Anchalee Worrachate.

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