The pound against the dollar reaches a new high of over two years, strategists warn: the upward trend is difficult to continue.

The pound against the dollar reached a more than two-year high this week, but strategists at J.P. Morgan Private Bank, Credit Suisse Global Markets, and Jefferies say the pound's rally is looking increasingly fragile. After the Federal Reserve's substantial rate cut on Wednesday, the Bank of England decided to keep rates unchanged on Thursday, prompting the pound against the dollar to rise to its highest level since March 2022. The pound has been the best-performing currency among G10 currencies this year, with bets on further strengthening of the pound reaching close to the highest level in a decade. However, weak economic growth in the UK in the first half of the year, combined with the possibility of a tightening budget from a Labour government in October, suggests storm clouds ahead increasing the likelihood of the Bank of England needing to accelerate rate cuts to protect the economy, while also removing a key support for the pound. Tim Graf, head of macro strategy for Europe, the Middle East, and Africa at Credit Suisse Global Markets, said: "I think the pound against the dollar is living on borrowed time. Ultimately, I think the pound against the dollar exchange rate will decline in the next three to six months." As other central banks accelerate easing measures, the Bank of England's gradual rate cuts mean that pound trading has become crowded for investors seeking higher relative returns. The Commodity Futures Trading Commission's position data shows that long positions in pounds held by hedge funds and other leveraged funds have been hovering near their highest level since 2014 after a surge in July. Over the past month, institutional investors' bullish sentiment towards the pound has reached the highest level in a year. Matthew Landon, global market strategist at J.P. Morgan Private Bank, said: "Chasing these trends in the short term doesn't make much sense." On Friday, the pound against the dollar was at 1.33, and strategists at HSBC Holdings said that the current level of the pound "looks unsustainable." It's undeniable that the pound has performed well this year. One thing that can be certain is that the risk-reversal indicator, which serves as a barometer of market positioning and options sentiment, shows that the market remains bullish on the pound for the next month, although trading will become more crowded. Traders say that demand for UK assets is expected to continue after the change in government. However, risks remain in the long term. While the pound against the dollar may continue to rise to 1.35 in the coming weeks, Brad Bechtel, global head of foreign exchange at Jefferies, said he is "cautious" about further upside. Bechtel said: "There may be some upside potential for the pound against the dollar, but not much." The market expects the Bank of England's rate cut by the end of the year to be only 40 basis points, much lower than the Federal Reserve's 70 basis points. More and more strategists believe that the Bank of England's rate cut next year may exceed that of the Federal Reserve. Some predict that next month's "tightening budget" in the UK will increase taxes and cut spending, which will not help the economy in the short term. Stephen Jen, CEO of Eurizon SLJ Capital, said this may prompt the Bank of England to accelerate rate cuts to cushion the demand shock, while also harming the pound.