Is the GBP big short playing out?
Bygone era, where the sun never set on the British empire when the GBP pre WW1 was the reserve currency, and when unloading gilts was as gentlemanly as having morning tea and scones with investors and popping the question whether they would like to buy newly issued gilts, investors would usually say yes because Britannia rules the waves.
But, the 21st century is another world where the People’s Bank of China has more of an impact on global markets than the Bank of England.
Moreover, Britain no longer has the geopolitical clout it once had.
Today, the UK army is not even considered a top fighting force, according to Defence Secretary Ben Wallace.
So, its geopolitical influence on world politics and global trade is slipping into irrelevance, overshaped by the Great powers of the 21st century USA and China and the rise of India.
Across the English Channel lies a Superstate, the European Union, with a GDP of $17.5 trillion (2024) and the largest single bloc currency, the EURO Euro land provides attractive alternatives to GDP-denominated assets and access to a $17.5 trillion market, making it hard for the UK to compete for inward investment. Poland and Ireland have been the beneficiaries of inward investment due to Brexit.
From BREXIT to the GBP big short
As Darren Winters points out, perhaps Britain’s imperial past led to the delusion of today being grandiose and Brexit, the UK divorcing itself from the EU—the headwinds this has had on the UK economy and GBP speaks volumes.
Even proponents of Brexit have admitted that they overestimated the economic benefits of the UK’s rupture from the EU.
The UK’s GDP is $3.7 (2024) versus the EU ($17.5 trillion), so Brexit is like a lightweight stepping into the ring with a heavyweight champion.
It doesn’t take a great strategist to figure out that Brexit would lead to more harm to the UK than to the EU.
GBP big short, rattling the special relationship
Then the UK, bloody-nosed and on the ropes, doubles down on stupid, rattling the special relationship it has with Uncle Sam by sending Labour members of parliament politicians to canvas in the US for Democratic candidate Harris.
But didn’t any of those highly paid think tanks ask a simple question;
What happens if Trump wins?
Payback is a bitch.
Did they also forget history?
The American War of Independence was a war fought from 1775 to 1783 between the British and the American colonies, where America gained its independence from Britain.
So, it would have been strategically wiser for UK MPs to avoid canvassing in US presidential elections on US soil.
UK fumbles into isolation, making GBP big short a winner?
Across the English channel, Brexit has rattled the UK’s largest trading partners.
“At the beginning of 2022, Brexit had already cost UK households a total of £5.8 billion in higher food bills,” according to LSE research.
Brexit has been nothing short of a disaster.
Across the pond, the UK’s labour government has played its cards badly and ruffled the feathers of the Trump administration.
Elon Musk, who heads the DOGE department in the Trump administration, recently asked a loaded question; “should the US liberate Britain?”
GBP big short, as US investors repatriate their gold from London
The UK has been haemorrhaging foreign investments, amounting to billions of dollars, with Brexit being the culprit.
Moreover, Darren Winters notes that London has also experienced a record number of gold outflows since January.
The amount of gold stored in London vaults fell by 4.9 million troy ounces in January, the worst monthly decline since records began in 2016, as traders rushed to ship the precious metal to the US.
The reason given is that investors want to move the gold back to the US ahead of Trump tariffs, but could there be another reason?
So GBP is the worst-performing G10 currency this year, and all nine of the currencies have strengthened against the USD since the start of 2025.
GBP is the only G10 currency which has fallen against the USD since 2025. Since the end of September, there has been a clear downward trend in the exchange value of GBP.
The current exchange rate is one of the worst GBP has traded in the last 50 years.
UK Gilt market rout and the GBP big short
In a recent piece, I noted that the UK’s 10-year gilt hit 4.7%, with the public deficit near its highest level since the 60s, making the deficit burdensome to service.
“At this rate, will the UK need an IMF bailout in 2025?” I wrote.
Are the stars aligning for the GBP big short?
Hedge funds are now starting to bet against GBP.
Since Labour won the general election, hedge funds are consolidating their bets against the continued fall of the GBP.
The current bets against GBP are the highest in the last 10 months.
To make matters worse, the Bank of England has halved its growth forecasts for 2025 to 0.7% GDP growth in 2025 and has also increased its forecast for inflation to 3.5%.
So, the BOE’s latest forecast is for a weaker economy with more inflation and declining tax revenues.
Balancing the books could be challenging.
The six months of economic data for the UK economy looks worse than six months ago.
The BOE is flagging that things are getting worse and that they will have to revise the economic data downwards.
Two hard choices face the chancellor if the goal is to balance the books, either cut spending or increase taxes or the stealth printing of currency to finance the debts.
Investors are now betting on a GBP big short, and there is a sense of
deja vu when, in 1992, the GBP crashed.
The UK was kicked out of the ERM, and Soros bagged a billion dollars betting on a GBP crash.