Pound traders brace for another 8% Slump After Market Rout

(Bloomberg) — Traders in the options market are bracing for the pound to fall more than 8% as the fiscal woes that prompted a painful sell-off in U.K. markets last week weigh on the currency

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There is great demand for contracts that pay below $1.20 – almost 2% lower than where the currency was trading on Friday – according to data from the Depository Trust & Clearing Corporation. Some traders are also betting on the pound falling below $1.12, the weakest level in more than two years.

Sterling proved the weakest currency among developed nation peers last week as concerns over Donald Trump’s policies, sticky inflation and high borrowing levels triggered a global retreat – with the axis of the United Kingdom 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 this point,” said Jamie Niven, a fund manager at Candriam. “On the one hand, you have a very limited price in the cuts of the Bank of England, while the fiscal concerns are also negative sterling.”

The pound fell in tandem with other UK assets last week as 10- and 30-year gold yields jumped a quarter of a percentage point and the FTSE 250 stock index recorded a its worst drop since mid-2023. That prompted comparisons with the meltdown of the market after Liz Truss’s disastrous mini-budget in 2022, even if the severity of the moves was not combined.

However, demand for pound options last week surpassed levels seen during that crisis – and also around the 2016 Brexit referendum.

According to Mimi Rushton, global head of currency distribution at Barclays, there has been a 300% increase in trade inquiries regarding sterling options, as hedge funds flock to bet on more weak The unusually high volumes made some trading conditions “more challenging,” he said.

Contracts on the pound that pay if it strengthens against the dollar were in favor at the beginning of the year. But the spike in bond yields seen last week prompted the sharpest change in sentiment in more than two years, DTCC data show.

Demand for “longer-dated options remains quite high, suggesting the market is not yet done with this issue,” said Tim Brooks, head of FX options trading at Optiver.

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