(Bloomberg) — Traders in the choices market are preparing for the pound to tumble as much as 8% more as fiscal woes that prompted a painful selloff across UK markets last week weigh on the currency.
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There’s sizable demand for contracts that pay out below $1.20 — almost 2% lower than where the currency was trading on Friday — in keeping with data from the Depository Trust & Clearing Corporation. Some traders are even betting on sterling falling below $1.12, the weakest level in greater than two years.
Sterling proved essentially the most fragile currency amongst developed-nation peers last week as concern about Donald Trump’s policies, sticky inflation and high levels of borrowing triggered a world retreat — with UK assets on the epicenter of the turmoil. Investors say the market is underestimating the necessity for rate cuts to spur the economy, one other source of potential pressure for the pound.
“The trail of least resistance is lower at this juncture,” said Jamie Niven, a fund manager at Candriam. “On one side, you’ve very limited pricing in of Bank of England cuts, while the fiscal concerns are also sterling negative.”
The pound slumped in tandem with other UK assets last week as 10-and 30-year gilt yields jumped 1 / 4 percentage point and the FTSE 250 stock index notched its worst drop since mid-2023. That prompted comparisons with the market meltdown after Liz Truss’s disastrous mini-budget in 2022, although the severity of the moves was not matched.
Still, demand for pound options last week surpassed levels seen during that crisis — and even across the 2016 Brexit referendum.
In keeping with Mimi Rushton, Barclays’ global head of currency distribution, there was a 300% increase in trade inquiries regarding sterling options, as hedge funds flocked to bet on further weakness. The unusually high volumes made some trading conditions “tougher,” she said.
Contracts on the pound that pay out if it strengthens against the dollar were in favor in the beginning of the yr. However the spike in bond yields seen last week has prompted the sharpest shift in sentiment in greater than two years, the DTCC data show.
Demand for “longer-dated options stays quite elevated, suggesting that the market is just not yet done with this theme,” said Tim Brooks, head of FX options trading at Optiver.