"Stretched" Pound Sterling At Risk Warns HSBC

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Pound Sterling is "stretched" and at risk of a pullback heading into the Bank of England's Thursday policy decision.

This is according to a new analysis from HSBC, which finds the current market positioning on the Pound is too optimistic.

"The latest IMM positioning data shows that net non-commercial long GBP positions are at their largest since the financial crisis. This broadly aligns with GBP being the best-performing G10 currency relative to the USD year-to-date," says Dominic Bunning, Head of European FX Research at HSBC.

"We have argued there is little justification for this performance and believe these stretched levels of positioning are increasingly vulnerable to any potential dovish shift by the BoE this week," he adds.

The Pound has rallied in 2024 amidst a rerating in expectations on the timing and quantum of Bank of England rate hikes.

Markets have pushed back the expected timing of the first hike to August, with about 63 basis points worth of hikes now priced for the year as a whole.

Bunning says there is a risk of these expectations rising on Thursday when the Bank delivers its next policy decision and guidance:

"The market is well priced for an unchanged rate decision, but there is a marginal dovish skew to the risks around the vote split and the language in the BoE statement, in our view. Recent developments in labour markets and inflation have been underwhelming and could be the catalyst to the BoE sending a slightly softer message, and to recent GBP outperformance reversing."

The Bank of England could prove a catalyst for a selloff that rebalances GBP positioning to more neutral levels.

HSBC's research finds that when long positions have risen above a 5-year z-score threshold of 1.75 - as they have recently - more often than not, the following 12-week performance of GBP-USD is usually negative.

Furthermore, "the scale of this downside is historically much larger than the upside," says Bunning.

In recent weeks, HSBC's tacticians have looked for the Pound to underperform the Euro, "but the scope for broader GBP weakness could be building given the increasingly stretched positive sentiment on the currency," says Bunning.

Ahead of the Bank of England the Pound will be tested by Wednesday's inflation data, followed by the PMI figures for March. Friday's retail sales release rounds off the week.