Societe Generale reports that the British Pound (Sterling) has been the strongest performing G10 currency since the Makerfield by-election on 18 June, outperforming its peers by a margin of 1% during this period [1]. The bank attributes this strength to a still-sizeable, though reduced, speculative short base, which stood at 35.5% of open interest as of late June. This reduction in short positions suggests there is further room for Sterling to appreciate, particularly on cross rates such as EUR/GBP and GBP/JPY, rather than against the US dollar directly [1].
Additional support for GBP/USD came from merger and acquisition activity, specifically after Castlelake submitted a cash bid of £5.2 billion to purchase EasyJet over the weekend [1]. Furthermore, a US bank recently upgraded UK assets from market-weight to overweight, a move echoed by Societe Generale's own Asset Allocation team, which maintains an overweight stance on UK stocks due to their superior dividend returns [1].
Political developments are also in focus, with the Labour leadership contest commencing on Thursday and nominations closing on 16 July. If unchallenged, Andy Burnham would be formally appointed Prime Minister on 20 July. Despite some concerns about the Labour party potentially shifting left under Burnham, Societe Generale notes that Sterling's performance remains robust [1].
CONCLUSION
Sterling's recent outperformance is underpinned by reduced speculative shorts, supportive M&A flows, and positive asset allocation shifts by major banks. With further room for gains identified, especially on cross-currency pairs, and ongoing political developments, market sentiment towards UK assets remains constructive.