British Pound hits over two-year high against US Dollar, strategist warns: the rally may not be sustainable

According to the Wisdom Financial APP, the British pound against the US dollar hit a new high this week, but strategists from Morgan Stanley Private Bank, Dow Fu Global Markets, and J.P. Morgan believe that the rally of the British pound is looking increasingly fragile. After the Federal Reserve cut interest rates significantly on Wednesday, the Bank of England decided to keep interest rates unchanged on Thursday, pushing the British pound against the US dollar to its highest level since March 2022. The pound sterling has been the best-performing currency among the G10 currencies this year, with bets on further strengthening of the pound reaching near the highest level in nearly 10 years. However, the UK's economic growth in the first half of the year was weak, coupled with the possibility of a tightening budget by the Labour government in October, indicating storm clouds ahead - this increases the likelihood of the Bank of England needing to accelerate rate cuts to protect the economy, while also removing a key support for the pound. Tim Graf, Head of Macro Strategy for EMEA at Dow Fu Bank, said: "I believe the British pound against the US dollar is surviving on borrowed time. Ultimately, I think the GBP/USD exchange rate will decline in the next three to six months." As other central banks accelerate easing measures, the Bank of England's gradual rate cuts mean that pound trading is crowded for investors seeking higher relative returns. Position data from the US Commodity Futures Trading Commission (CFTC) shows that hedge funds and other leveraged funds' long positions in the pound soared after July and are currently hovering near the highest level since 2014. In the past month, institutional investors' bullish sentiment towards the pound has reached the highest level in a year. Matthew Landon, Global Market Strategist at Morgan Stanley Private Bank, said: "Chasing these trends in the short term doesn't make much sense." On Friday, the GBP/USD exchange rate was at 1.33, with strategists at HSBC Holdings stating that the current level of the pound "looks unsustainable." Strong performance of the British pound this year It is certain that the risk reversal indicator, which serves as a barometer of market positioning and option sentiment, shows that the market remains bullish on the pound in the next month, despite trading becoming more crowded. Traders indicate that demand for UK assets is expected to continue after the change of government. However, risks remain in the long term. While the GBP/USD may further rise to 1.35 in the coming weeks, Brad Bechtel, Global Head of Foreign Exchange at J.P. Morgan, said he is "cautious" about further upside. Bechtel said: "There may be some upside potential for the GBP/USD, but not much." The market expects the Bank of England to cut interest rates by only 40 basis points by the end of the year, far below the Federal Reserve's 70 basis points. More and more strategists believe that the Bank of England's rate cuts next year may exceed those of the Federal Reserve. Some predict that next month's "tightening budget" in the UK will increase taxes and cut spending, which will not help the economy in the short term CEO of Eurizon SLJ Capital, Stephen Jen, stated that this may prompt the Bank of England to accelerate its rate cuts to cushion the demand shock, while also hurting the British pound