Sterling's net long position is high, warning of a market sell-off

Brad Bechtel, global head of FX at Jefferies, said: "I am short the pound against the dollar because I think the difficulties facing the UK economy and the Bank of England are starting to peak and I expect the pound to bear the brunt."

Until recently, the pound has been on a roll, but a rebound in the dollar, a sharp rise in bond yields, and implicit market expectations for Bank of England interest rates have hampered the pound's rally since mid-month, then fueled the correction now underway.

Brad Bechtel, global head of FX at Jefferies, said: "I'm short the pound against the dollar because I think the difficulties facing the UK economy and the Bank of England are starting to peak and I expect the pound to bear the brunt."

The acceleration of wage growth, the resilience of the economy and a rebound in core inflation have led to market-implied bank rates reaching 6.25% in recent weeks and prompted the Bank of England to raise its base rate from 4.5% to 5% last Thursday, but since then the pound has lost ground against the dollar.

The increase in speculative interest in sterling could prevent it from falling further in recent trading, but if the latest economic growth data from the UK on Friday disappoints, or the US inflation data on Friday goes against the Federal Reserve, there may be more to the pound than just a statistical risk.

Sterling's recent weakness may be a simple profit-taking issue as traders reduce their long positions after the pound recently rose to around 1.28 near its 2023 high. Market analyst Paul Spirgel said that according to the latest IMM spec data, speculative traders in sterling bought a large number of 3,873 contracts, and in the absence of a follow-up rally, they may sell weak bulls ahead of the recent uncertainty over inflation and interest rate developments and the US holiday next week.

Brent Donnelly, chief executive of Spectra Markets, said: "There is a lot of long positions in sterling but I don't see the catalyst for me to want to short sterling at the moment."

The survey of economists showed that official data will confirm that the British economy grew by 0.1% in Friday's Quarter 1, just hours after the Federal Reserve's preferred measure of inflation will show that core personal consumption expenditures price index inflation will remain at 4.7% for the year to the end of May.

However, in the absence of a catalyst for further correction, there are few technical hurdles on the charts to prevent GBP/USD from recovering to the 1.2850 level in early June, which could happen if the current dollar rally fails for any reason in the coming days.

The latter is particularly likely if the Fed's preferred core inflation measure weakens further, as it would put a question mark over expectations of another US rate hike later this year, although some strategists say the current high gilt yields should also prevent sterling from falling sharply further.

Michael Cahill, G10 FX strategist at Goldman Sachs, wrote in a research note on Friday: "The reaction of exchange rates to this week's inflation data bears some of the worrying features of last autumn, suggesting that markets are beginning to question whether policymakers are up to the challenge. We very much doubt that more aggressive rate hikes could reduce economic growth, leading to currency depreciation. As long as policymakers remain committed to raising real interest rates, this should support the pound."

GBP/USD daily chart

At 10:05 on June 29, Beijing time, the pound was trading at 2631/32