(Bloomberg) -- Expectations for the pound to strengthen are gathering momentum given predictions the Bank of England may cut interest rates less aggressively than major peers.

Investor positioning turned net bullish sterling for the first time since September during the week to Dec. 5, according to data from the Commodity Futures Trading Commission. Leveraged funds increased their net long position to the highest in a month, while institutional investors trimmed net shorts. 

The bullish wagers come as Goldman Sachs Group Inc. boosted its pound forecast - predicting a gain to $1.30 in six months instead of a retreat to $1.20, its previous estimate. The bank says the British currency will benefit from the BOE starting its easing cycle later than the Federal Reserve and the European Central Bank, which are expected to cut rates in the first half of the year. 

“A quicker move to rate cuts elsewhere will make the Bank of England less of a dovish outlier,” Goldman strategists including Kamakshya Trivedi wrote in a note Friday. “The recent market trend is potentially quite supportive for the pound.” 

While the UK central bank was always seen holding rates high for longer, that discrepancy became more pronounced over the past couple of months. Since early October, markets priced in about 90 basis points of additional interest-rate cuts from the ECB, while adding 45 basis points to BOE expectations.

Investors are now betting on a total of 110 basis points of easing by the Fed and 135 basis point by the ECB next year, while penciling in around 85 basis points of easing by the BOE.

Investors are warming to the pound given that inflation remains higher in the UK than in both the euro zone and the US, said Jane Foley, head of FX strategy at Rabobank. Still, she expects ongoing weakness in the UK economy will ultimately make it difficult for sterling to appreciate significantly next year, and sees the currency hovering around current levels versus the euro through mid-2024. 

Goldman’s forecast is more bullish than the median estimate for the pound in a Bloomberg survey, which currently stands at $1.26 by the end of the second quarter of 2024. But some investors say there’s even more room for the pound to run, with Fidelity International predicting it will strengthen to the $1.40 level next year. 

In a separate report, Goldman also revised its forecast for the BOE to begin its rate cutting cycle in August, earlier than initially expected, citing a quicker decline in inflation. Still, the bank sees other central banks, including the ECB, cutting faster and more aggressively.

The pound was steady on Monday, trading around $1.2550 in London. It’s advanced about 3.8% against the dollar this year, the second-best-performing Group-of-10 currency after the Swiss franc. 

--With assistance from Aline Oyamada and Alex Nicholson.

(Adds detail on positioning and Goldman’s view, Rabobank’s comment starting in second paragraph.)

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