(Bloomberg) — Options traders are bracing for the pound to fall as much as 8% as the fiscal woes that fueled a painful sell-off in British 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 on the pound falling below $1.12, the weakest level in more than two years.
Sterling emerged as the weakest currency among developed-country rivals last week as concerns over Donald Trump’s policies, sticky inflation and high debt levels sparked a global pullback – with UK assets at the epicenter of the turmoil. 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 a very limited cost of reducing the Bank of England, while the fiscal issues are also negative.”
The pound fell in tandem with other British assets last week as yields on 10- and 30-year gilts jumped a quarter of a percentage point and the FTSE 250 stock index posted its worst fall since mid-2023. It prompted comparisons with the market crash following Liz Truss’s disastrous mini-Budget 2022, although the severity of the move was not the same.
Still, demand for sterling options last week exceeded levels seen during that crisis – and even around the 2016 Brexit referendum.
According to Mimi Rushton, Barclays’ global head of currency distribution, there was a 300% increase in trading inquiries in pound options as hedge funds rushed to bet on further weakness. The unusually high volumes made some trading conditions “more challenging,” she said.
Contracts on the pound, which pay out if it strengthens against the dollar, were in the lead at the start of the year. But a jump in bond yields last week prompted the sharpest change in sentiment in more than two years, DTCC data showed.
Demand for “longer options remains quite high, suggesting the market is not done with this theme yet,” said Tim Brooks, head of FX options trading at Optiver.
