(Bloomberg) -- JPMorgan Chase & Co. is warning the pound’s peer-beating rally could be vulnerable to a correction, as bullish bets in the currency climb to a record high.
Non-commercial traders, a group that includes hedge funds, asset managers and other speculative market players, pushed their net long position on the pound to an all-time high, according to Commodity Futures Trading Commission data going back to 1999. Leveraged funds boosted their bullish wagers to the most since 2018, while asset managers also increased their long bets.
The positioning likely reflects the UK’s relatively benign economic backdrop and the currency’s appeal to carry traders as the Bank of England delays easing policy, according to JPMorgan strategists. But those trades, based on the pound’s high yields relative to other currencies, could be set to unwind in a period of uncertain monetary policy, as well as a chaotic US presidential election.
Sterling is “very clearly at risk of any deterioration in its local outlook, further capitulation of the global carry phenomenon or any other broader deleveraging event,” wrote JPMorgan FX strategists led by Patrick Locke in a note.
Carry trades, which harvest the extra income on higher-yielding currencies, thrive in calm markets when there’s a lower risk of wild price swings wiping out profits. Those using Group-of-10 currencies returned around 7% since the start of the year.
Despite the near-term risks, JPMorgan is sticking by its forecast that sterling will extend its recent run of gains to hit $1.35 by March next year.
The pound has climbed nearly 2% since the start of the year, outperforming all Group-of-10 peers versus the dollar, and is currently trading around $1.29 after hitting its strongest level since July 2023 last week.
“The jump in net longs seems remarkable, it would be shocking if the pace of this jump is maintained at the next set of data,” said Jane Foley, head of FX strategy at Rabobank. “Either way, the pound has been performing well following the UK election and the trend toward growth in net longs is not a surprise.”
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