Pound Traders Are Ready for Another 8% Slump After Market Rout

(Bloomberg) — Options traders are bracing for a further 8% drop in the pound as fiscal issues that caused a painful sell-off in UK markets last week weighed on the currency.

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According to the Depository Trust & Clearing Corporation, there is significant demand for contracts paying below $1.20, which is almost 2% lower than the currency traded on Friday.Some traders are even betting on sterling to fall below $1.12 on, which is the weakest level in the last two years.

Sterling was the weakest among developed peers last week as concerns over Donald Trump’s policies, sticky inflation and high borrowing levels led to a global retreat, with UK assets at the epicenter of the jitters , which is another source of potential pressure for the pound.

“The path of least resistance is lower at the moment,” said Jamie Niven, fund manager at Candriam.

The pound fell in line with other British assets last week as 10- and 30-year gilt yields rose by a quarter of a percentage point and the FTSE 250 stock index posted its worst fall since mid-2023, prompting comparisons with the market’s disastrous 2022 collapse after the mini-budget, although the severity of the moves was not matched.

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

According to Mimi Rushton, global head of currency distribution at Barclays, trading requests for sterling options increased by 300% as hedge funds flocked to bet on further weakness. The unusually high volumes made some trading conditions “more difficult”. he said.

Contracts on the pound, which is paid on a strengthening dollar, were in favor at the start of the year, but a rise in bond yields seen last week prompted the sharpest shift in sentiment in more than two years, DTCC data showed.

“Demand for longer-term options remains quite high, suggesting the market is not over on this topic,” said Tim Brooks, head of FX options trading at Optiver.

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