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(Bloomberg) — Options traders are bracing for the pound to fall as much as 8% as fiscal woes that sparked a painful sell-off in U.K. markets last week weigh on the currency.
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There is considerable demand for contracts paying below $1.20, nearly 2% lower than where the currency traded on Friday, according to data from the Depository Trust & Clearing Corporation. Some traders are even betting that sterling will fall below $1.12, the weakest level in more than two years.
Sterling proved the weakest currency among developed-country peers last week as concerns over Donald Trump’s policies, sticky inflation and high debt levels led to a global pullback, with assets United Kingdom at the epicenter of the crisis. Investors say the market is underestimating the need for rate cuts to stimulate the economy, another source of potential pressure on the pound.
“The path of least resistance is lower at the moment,” said Jamie Niven, fund manager at Candriam. “On the one hand, you have very limited pricing on the Bank of England cuts, while fiscal concerns are also negative.”
The pound fell alongside other UK assets last week as 10- and 30-year gilt yields rose by a quarter of a percentage point and the FTSE 250 index posted its worst fall since mid-2023. This prompted comparisons with the market crash following Liz Truss’s disastrous mini-budget in 2022, although the severity of the moves did not match.
However, demand for sterling options last week exceeded levels seen during this crisis, and even around the 2016 Brexit referendum.
According to Mimi Rushton, global head of currency distribution at Barclays, there was a 300% increase in trade inquiries for sterling options as hedge funds flocked to bet on further weakness. The unusually high volumes made some trading conditions “more challenging,” he said.
Contracts on the pound that pays if it strengthens against the dollar were in favor at the start of the year. But the rise in bond yields seen last week has led to the sharpest change in sentiment in more than two years, DTCC data show.
Demand for “long options remains quite high, suggesting the market is not done with this issue yet,” said Tim Brooks, head of currency options trading at Optiver.
