LONDON: Sterling's rally in the past three months on surprisingly strong economic data is losing momentum with investors wondering if they have been too aggressive in anticipating rate rises from the Bank of England.
Speculators including hedge funds, who have driven the pound nearly 10 percent higher against the dollar since July, have bought the currency in recent days on expectations of robust third-quarter growth data, due out on Friday.
The British economy is forecast to have grown 0.8 percent, faster than in the previous three months, and 1.5 percent year-on-year. By contrast, recovery in the United States seems to be faltering and the euro zone is just emerging from recession.
More forecast-beating numbers should underpin expectations the British central bank will tighten policy much sooner than it flagged in its controversial "forward guidance" in August.
Yet some analysts say investors have jumped so far ahead of themselves in pricing in earlier-than-expected rate hikes that the impact of forecast-beating data may diminish. "Given how bullish investors have been in the run-up to the GDP data, which is expected to be good, there is a chance that if it disappoints, you could see a correction in sterling/dollar," said Sebastien Galy, currency strategist at Societe Generale in New York.
"We expect some consolidation before it can move higher." Losses, though, may be seen as a buying opportunity by investors such as reserve managers, given expectations the British economy is firmly on the path of recovery.
Sterling gained 6 percent in August and September, soaring to $1.6260 on Oct. 1, its highest since early January. It is up nearly 10 percent since hitting a three-year low of $1.4814 on July 9. Against the euro too, sterling has recovered from 4-1/2 month lows struck on August 2. Now fund managers say chances are waning that it can rise much further on robust UK data, given the BoE has pledged to keep rates anchored and policy accommodative.
"Sterling has run its course," said Daniel Loughney, portfolio manager at Alliance Bernstein, which has $445 billion of assets under management. "The data will disappoint and we think the rates market has priced in too much tightening."
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