September 27, 2022/Capital.com

According to European investment trading platform, Capital.com, its GBP/USD traders have increased their short exposure to the GBP during early trading today. At the time of writing, 50% of all GBP/USD trades reported on the platform were short GBP.  This is a significant change in sentiment from earlier in the week when traders were 69% long GBP against the USD (25/9/2022). 

Piero Cingari, Analyst at Capital.com says the run on the Pound may be showing early signs of a potential currency crisis.

“What was once a story about the pound depreciating due to a growing Fed-BoE policy divergence might now have evolved into the early stages of a currency crisis.

The pound has experienced extreme volatility over the past week off the back of the UK government’s Growth Plan 2022. The plan unveiled massive tax cuts and an aggressive  spending programme,  which needs to be financed by issuing more debt at a time when the BoE is raising interest rates and inflation is already at double digit. This move has raised  concerns about the viability of the UK’s public finances and contributed to declining investor confidence. Simultaneously, Gilt yields have risen sharply in response to the growing fiscal deficit markets are anticipating as a result of the UK’s Growth Plan 2022.

The only measure that may turn the tide is if the BoE steps in and announces a significant  rate hike— in excess of 200 basis points— in an emergency meeting and makes a bold statement against currency speculation. Such a move may increase the risk of a recession but failing to do so will only encourage short sellers to keep selling the pound, thereby deepening the currency crisis.”

Chart: GBP/USD yearly performance, Capital.com