Traders bet £3.6bn on pound rallying against the dollar as they gamble on UK inflation and interest rates staying higher for longer

Traders have placed a massive £3.6billion bet on sterling as they gamble on UK inflation and interest rates staying higher for longer.

The number of bullish bets on the pound versus the US dollar is at its highest since 2007, according to latest data from the Commodity Futures Trading Commission.

It means hedge funds and other currency speculators think sterling will rise from $1.31 – its highest in 15 months.

The sheer scale of the wagers in favour of the pound was described as ‘extraordinary’ by Jane Foley, head of foreign exchange strategy at investment bank Rabobank.

The news comes ahead of key inflation figures tomorrow.

Inflation battle: The number of bullish bets on the pound versus the US dollar is at its highest since 2007, according to latest data from the Commodity Futures Trading Commission

These are expected to show that the pace of price rises slowed in June from 8.7 per cent to around 8 per cent – still way above the Bank of England’s 2 per cent target. 

The gap between inflation in the US and UK is the widest since 1977.

The Bank of England is expected to raise rates again next month – possibly to as high as 5.5 per cent – having already hiked them from 0.1 per cent to 5 per cent since December 2021.

Financial markets reckon the base rate could top 6 per cent by the end of the year. Such forecasts have prompted a flood of ‘hot money’ from speculators seeking higher returns on sterling, analysts say. 

Inflation has stayed stubbornly higher in the UK than in other countries despite the Bank jacking up the base rate 13 times in a bid to tame soaring fuel and food prices after Russia’s invasion of Ukraine. 

In recent months, UK inflation has continued to defy expectations, sending the pound up 8pc against the dollar this year. 

Bank governor Andrew Bailey (pictured) last week said headline inflation was ‘set to fall markedly over the remainder of the year’

Bank governor Andrew Bailey last week said headline inflation was ‘set to fall markedly over the remainder of the year’ but his credibility remains on the line.

‘These sentiments are not new, so Bailey might forgive the markets for being a little sceptical on this front,’ said Foley.

By contrast, US inflation has dropped much faster, to just 3pc last month.

Falling inflation has caused the dollar to weaken recently against many major currencies, including the pound, amid hopes US interest rates may be about to peak. 

Bailey has been heavily criticised for letting inflation rip by not raising rates sooner. But he is now accused of going too far the other way and ‘overtightening’ – leaving the UK at the risk of tipping into a recession.

‘The Bank shouldn’t be raising rates,’ said Martin Beck, economist at the EY Item Club.

‘Policy is too backward-looking at the moment,’ he added, pointing to the slowdown in producer prices which will eventually feed into milder inflation.

Stronger sterling should help curb inflation because it makes the cost of imports cheaper as commodities like oil are priced in dollars, which will eventually take the heat out of price rises.

It is also good news for holidaymakers heading off to the US. But experts warn that untamed inflation and weak growth mean the pound’s popularity may not last.

‘If recession risks rise in the UK, the pound may revert to pushing lower on rate rises as investors take fright on the overall UK economic backdrop and cut back their sterling positions,’ Foley said.

This post first appeared on Dailymail.co.uk