Pound’s Plunge: Traders Bet on Further Decline Amid UK Fiscal Woes
As the UK’s fiscal concerns continue to weigh on the market, traders are bracing for a potential 8% drop in the pound’s value. The currency has already taken a hit, sliding 0.5% to $1.2147 on Monday, its weakest point since November 2023.
Fiscal Fears Drive Demand for Bearish Options
Data from the Depository Trust & Clearing Corporation reveals a surge in demand for contracts that pay out below $1.20, around 1% lower than the current trading price. Some traders are even betting on the pound falling below $1.12, a level not seen in over two years.
Sterling’s Vulnerability Exposed
The pound proved to be the most fragile currency among developed nations last week, as concerns about Donald Trump’s policies, sticky inflation, and high levels of borrowing triggered a global retreat. The UK’s assets were at the epicenter of the turmoil, with investors warning that the market is underestimating the need for rate cuts to spur the economy.
Rate Cut Concerns Add to Pressure
Fund managers, such as Jamie Niven at Candriam, believe that the path of least resistance is lower, citing limited pricing in of Bank of England cuts and fiscal concerns that are sterling negative.
Market Sentiment Shifts
The spike in bond yields last week prompted a sharp shift in sentiment, with demand for “longer-dated options” remaining elevated. According to Tim Brooks, head of FX options trading at Optiver, this suggests that the market is not yet done with this theme.
UK Officials Try to Reassure Markets
Despite the turmoil, UK officials are attempting to calm the markets. Darren Jones, the Treasury’s chief secretary, stated that the gilt market is functioning in an “orderly way.” However, strategists like Shreyas Gopal at Deutsche Bank AG are less optimistic, recommending positioning for sterling to drop against a basket of other major currencies.
The Road Ahead
As the pound continues its downward trajectory, traders are bracing for further declines. With fiscal woes and rate cut concerns weighing on the market, it’s clear that the pound’s troubles are far from over.
Leave a Reply