* Pound's near 10 pct rally since July low tough to repeat
* Traders cite less demand for options betting on more gains
By Anirban Nag
LONDON, Oct 24 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
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."
As soon as the BoE issued its forward guidance, many
investors took the view that rates would rise sooner than
The BoE said it would consider tightening when the jobless
rate fell to 7 percent, and that this could take three years.
However, after persistently strong data, sterling overnight
interbank average rates, which form the basis of
lending to the wider economy, are pricing in a slim chance of a
hike in the 0.5 percent bank rate as early as the first half of
The BoE acknowledged in the minutes of its most recent
meeting that unemployment, which remains elevated at 7.7
percent, was falling faster than forecast.
While some economists say the BoE may have to revise its
policy guidance, many remain cautious on sterling's outlook.
"So far the strong cyclical recovery in the UK economy is
not translating into markedly lower unemployment rates," said
Mansoor Mohiuddin, head of currency strategy at UBS. "We remain
cautious about sterling/dollar strength."
In the options market, too, traders said enthusiasm for bets
that sterling will gain much against the dollar was waning.
One-month sterling/dollar risk reversals, a gauge of demand
for options betting on a currency rising or falling,
show a bias for dollar strength, albeit much lower than it was
in late August.
"There hasn't been much demand for upside strikes in
sterling going into the GDP (gross domestic product) data," said
a chief option trader at a large European bank. "The hedge funds
are selling sterling into any weakness in data only to return to
buy it at $1.60. It is too good a trade to ignore."
The buying on dips reflects a conviction that Britain is
firmly on the road to recovery. But the rally from here looks
likely to be more measured than that of the past few months.
"We think sterling will be sticky at higher levels and data
surprises will be less positive," said Ken Dickson, investment
director of currencies at Standard Life, who helps oversee
$271.2 billion in assets. "We are neutral sterling/dollar."