Pound traders pare bets

Foreign-exchange traders pared bets on the pound’s (CME:B6U14) advance after the U.K. currency reached its strongest level in more than five years this month.

Bullish bets on sterling by hedge funds and other large speculators declined last week from the highest rate since 2007, according to data from the U.S. Commodity Futures Trading Commission. The pound weakened for a third day versus the dollar and U.K. government bonds were little changed today before a government report tomorrow that economists said will show inflation quickened in June, while staying below the Bank of England’s 2% target.

“The only question is whether there are reasons to curtail the long positions on the pound,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London, referring to bets on an advance. “Probably not yet,” though it would be sensible for investors to raise the threshold at which they’d end bets on sterling’s advance, known as stop-losses, closer to current market rates, he said. “Generally, the data has been good.”

Bets by hedge funds and other large speculators on an advance in the pound exceeded those wagering on a decline by 41,639 contracts on July 8, according to CFTC data. That’s down from 56,412 on July 4, which was the most since December 2007.

Sterling surged 11% in the past year against major peers in Bloomberg Correlation-Weighted Currency Indexes as investors bet the Bank of England would be the first major central bank to end extraordinary stimulus measures. New Zealand’s dollar, whose central bank increased interest rates last month, also rose 11%, while the euro gained 1.2% and the dollar slipped 3.4%.
 

Gilt Returns
 

The pound declined 0.2% to $1.7078 at 2:31 p.m. London time after climbing to $1.7180 on July 4, the highest since October 2008. Sterling was 0.3% weaker at 79.75 pence per euro, having touched 79.15 pence on July 7, the strongest level since September 2012.

Inflation in the U.K. accelerated to an annual 1.6% in June from 1.5% the previous month, according to a Bloomberg survey of economists. Separate data from the Office for National Statistics on July 16 will show the unemployment rate declined to 6.5% in the three months through May, according to another Bloomberg survey. April’s joblessness rate was the lowest in more than five years.

Ten-year gilt yields were little changed at 2.61% today, after falling 16 basis points, or 0.16%age point, last week. The price of the 2.25% bond maturing September 2023 was at 97.065.

Gilts returned 4.1% this year through July 11, according to Bloomberg World Bond Indexes. German securities earned 5.1% and Treasuries gained 3.3%.

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