Traders are increasingly taking short positions against the British pound as the U.K.’s cost of living crisis begins to bite.
Inflation came in at an annual 9-percent in April, a 40-year high, as food and energy prices continued to spiral after the U.K. energy regulator increased the household energy price cap by 54 percent at the start of the month.
Bank of England Governor Andrew Bailey has warned of an “apocalyptic” outlook for consumers as a recent survey also showed that a quarter of Britons have resorted to skipping meals.
Sterling has fallen almost 8 percent against the dollar year-to-date and hovered just below $1.25 as of Friday morning, slightly above a recent two-year low.
The Bank of England faces the unenviable task of raising interest rates in a bid to anchor inflation expectations while avoiding tipping the economy into recession, a balance that appears to be growing ever more difficult to strike.
The Bank expects GDP to slump in the final three months of this year and sees a “very sharp slowdown” ahead but not a technical recession — two straight quarters of contraction.
According to the most recent Commodity Futures Trading Commission data on May 10, asset managers and institutional investors held more than 128,000 short positions against the pound, compared to just 32,000 long positions.
Short-selling is an investment tactic where a speculator borrows a financial instrument or asset, such as a stock, and sells it in the hope of buying it back later at a lower price, thereby making a profit.
Goldman has already recommended investors go long on the euro against the pound, with a target of £0.87, and this week also launched a short position on the pound against the Swiss franc, with a target of 1.18 and a stop at 1.24.