International Money Market currency speculators in the latest week increased bets in favour of sterling to record levels, data released on Friday showed, swelling net dollar shorts to massive levels.
Net long sterling positions were increased to 45,003 contracts in the week through August 1, from 22,659 contracts the prior week, data from the Commodity Futures Trading Commission showed. That amounts to net longs worth $5.235 billion, according to Reuters calculations.
Speculators also sharply increased net euro longs and cut net yen short positions nearly in half after running them to a record 76,886 contracts the prior week.
Positions in these three currencies helped net dollar short positions surge to 96,751 contracts worth $13.2 billion, according to Reuters calculations, more than six times the $2.2 billion worth of net dollar shorts seen the prior week.
The bets in favour of sterling were carved out before Wednesday's surprise interest rate hike from the Bank of England, which helped push the British currency to a 15-month high above $1.91.
Likewise with the euro, as net speculators where long the euro zone single currency to the tune of $11.77 billion even before the European Central Bank hiked rates on Thursday.
"Certainly, there's likely to have been more positions added since Tuesday," said Peter Frank, currency strategist at ABN AMRO in Chicago.
If the Fed opts to leave interest rates unchanged on Tuesday, speculators are likely to ratchet up dollar shorts further. After Friday's unexpectedly soft US jobs data, fed funds futures were pricing in less than a 20 percent chance of a hike at the August 8 meeting, down from nearly 90 percent two weeks ago.
Being "long" a currency is effectively a bet it will strengthen, while being "short" is a bet it will weaken.
Extreme market positioning often suggests a currency is poised to snap back, largely because investors are uncomfortable holding increasingly large exposure in a currency over an increasing length of time.