Hedge funds and asset managers have increased their bearish bets on the British pound through options markets, driven by heightened concerns over potential political instability and looser fiscal policies. This follows a statement last week by Manchester Mayor Andy Burnham outlining a potential path to challenge the position of UK Prime Minister Keir Starmer.
Data from the Depository Trust & Clearing Corporation shows that on May 14 and 15, trading volume in pound put options was more than six times that of call options valued at a minimum of £100 million. Concurrently, trading volume for pound versus dollar put options on the CME Group's central limit order book reached its highest level since April 8, 2024, on Thursday.
Burnham's declaration of his intent to run for a parliamentary seat, a prerequisite for challenging the Prime Minister, contributed to the pound's decline for a sixth consecutive trading day, reaching its lowest level in over five weeks. Investors perceive that a potential premiership under Burnham could pose risks to fiscal discipline, potentially leading to increased public spending, higher government bond issuance, and elevated borrowing costs.
"As political noise increases, we are seeing rising demand for pound put options from both short-term and long-term money accounts," said Julian Weiss, head of G-10 FX options trading at Bank of America in London.
Rob Turner, head of electronic FX trading at RBC Capital Markets in London, noted on Friday that the political developments have also triggered a "clear shift" in sentiment toward the pound in the spot market.
"Market participants started the week with relatively few long pound versus dollar positions, broadly in line with last month," Turner stated. By Thursday's close, positioning had shifted to a small net short position on the pound.
With a UK by-election scheduled for June 18, traders are increasingly focusing on options contracts that reflect potential market reactions post-vote. The premium for options hedging against a decline in the pound versus dollar over the next two months, compared to those hedging against an increase, saw its largest single-day rise since September 2 on Thursday, indicating growing demand for bearish positions. The subsequent decline in the pound suggests these bets may be extended further.
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