A London-based hedge fund is expecting the pound to fall further amid rising inflation and a gloomy economic forecast.
The pound extended its losses on 3 November after the Bank of England warned of the longest recession in nearly 100 years.
UK inflation topped 10.1% in September. The Bank is now expecting that figure to reach 11% by the end of 2022.
On 3 November, Threadneedle Street raised interest rates by 75 basis points to 3%, its biggest hike in over three decades. But Alberto Gallo, chief investment officer at hedge fund Andromeda Capital Management, said that hiking the rate to levels that are still well below inflation is “too little, too late.”
“By ignoring inflation, the Bank is gradually losing its already damaged credibility,” Gallo told Financial News.
The pound, which has lost more than 17% of its value against the dollar so far this year, has turned out to be one of the most profitable short bets for hedge funds.
“We estimate the pound will continue its slide towards parity against the US dollar,” Gallo said.
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According to Bank governor Andrew Bailey, increasing interest rates is the best way to get inflation down. However, he said that the rate hike of 75 basis points should not be considered the “new normal.”
In an interview with Reuters, John Floyd, a currency trader and macro portfolio manager at Floyd Capital Management, said that the Bank’s interventions this year have been interpreted as signs of continuing economic weakness.
But while the pound and the UK bond markets are struggling, the latest rebound in equity markets has opened up a some opportunities for hedge funds to add some tactical longs.
“A few hedge funds have added small tactical longs with a view to some price reversion,” said Kier Boley, co-head and chief investment officer of alternative investment solutions at UBP.
Since the Bank’s rate hike, the pound has fallen by almost 2%. The FTSE 100, on the other hand, has climbed by over 2%, reaching its highest level since mid-September.
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