A number of asset managers are betting that the pound will tumble in value as the U.K. wrestles with faltering growth and Finance Minister Rachel Reeves confronts a looming fiscal headache in next month’s budget. Candriam is positioned short against the pound, with Nicolas Jullien, Candriam’s global head of fixed income, highlighting the U.K.’s challenging outlook. RBC BlueBay Asset Management also holds a bearish bet against the British currency. Sterling was up around 0.02% against the dollar on Friday, trading at $1.343. Reeves is widely expected to hike taxes and cut spending in next month’s Autumn Budget, scheduled for Nov. 26, against a backdrop of stubborn inflation and meager GDP growth. New data published by the Office for National Statistics this week showed the U.K. economy grew just 0.1% in August. Production rose 0.4%, but construction dropped by 0.3% while services remained flat. Meanwhile, the IMF’s World Economic Outlook this week indicated that U.K. inflation would average about 3.4% this year, higher than that of all other developed economies. The Bank of England’s Monetary Policy Committee will next meet Nov. 6 to decide whether to cut its base rate, which currently stands at 4%. GBP= 5D mountain Sterling/dollar. “Market pricing for the Bank of England appears overly optimistic, with no cuts expected until March–April, which we believe underestimates downside risks,” Jullien said in a market commentary. Neil Mehta, portfolio manager for investment grade bonds at RBC BlueBay, told CNBC that inflation is likely to remain just below 4% for the rest of the year, despite improving wage data. Outlining BlueBay’s sterling short, Mehta highlighted the risks of the government relying solely on tax hikes to raise revenue, warning that such measures could dent investor sentiment and ultimately hamper growth. “All eyes will be on the budget, where actions will speak louder than words,” Mehta said in an email. “With the government languishing in public polls and being pulled in different directions internally, the specter of stagflation remains the base case. Pound investors would want to stay clear.” Meanwhile, RBC BlueBay’s Chief Investment Officer Mark Dowding noted how yields on U.K. 10-year gilts edged lower this week as the ruling Labour Party continues to weigh up spending cuts alongside tax rises. “As we reflect on this, we think that should yields continue to rally and test 4.4% in 10’s, this could be an attractive area to sell, on the view that inflation and political risks are hard to discount,” Dowding said in a note Friday. The yield on U.K. 10-year gilts was around 4.483% on Friday, down about 2 basis points.
