A surprise political development in the UK has sent shockwaves through the currency markets. Andy Burnham, the Mayor of Manchester, has declared his intention to potentially challenge for the position of Prime Minister, triggering a wave of bearish bets against the pound. Hedge funds and asset managers have rushed into put options on sterling, with trading volume for these bearish contracts surging to more than six times that of call options.
Last week, following Burnham's move to clear a path for a potential leadership challenge, major financial players significantly increased their bearish wagers on the British currency. This reflects growing market anxieties about potential political instability and a loosening of fiscal discipline. Data shows that during a key two-day period, the trading volume for pound-dollar put options with a notional value of at least £100 million was over six times greater than the volume for call options.
Simultaneously, trading activity for pound-dollar put options on a major exchange platform reached its highest level in over a month. Burnham's announcement that he intends to run for parliament—a prerequisite for challenging current Prime Minister Keir Starmer—contributed to the pound's decline against the dollar for a sixth consecutive day, pushing it to a more than five-week low. Investors perceive a potential Burnham premiership as a risk to fiscal responsibility, potentially leading to higher public spending, increased government bond issuance, and elevated borrowing costs.
"With the political noise ramping up, we've seen demand for pound puts increase from both fast-money and real money accounts," noted a senior foreign exchange options trader in London.
The political events last week also prompted a "clear shift" in sentiment among spot market investors towards the pound, according to an electronic FX trading director. He observed that market participants began the week with a modest net long position on sterling, similar to the previous month, but by the close of trading on Thursday, this had flipped to a slight net short position.
With a key parliamentary by-election scheduled for mid-June, traders are increasingly focusing on options that capture potential post-vote volatility. The premium for protecting against a decline in the pound over the next two months, relative to the cost of insuring against a rise, saw its largest increase in months last Thursday, indicating strong demand for downside protection. The pound's subsequent drop suggests these bearish positions may be extended further.
"We've seen some selling of sterling, reflecting both UK political concerns and a resurgence of dollar buying due to higher oil prices and lack of progress on other geopolitical fronts," said a G-10 spot trading head. He added that while clients are selling the pound against the dollar, they currently seem "reluctant" to aggressively chase a decline in sterling against the euro in the spot market.
Recent reports highlight the challenging political landscape. A recent survey found very low public approval ratings for Prime Minister Starmer, with a significant majority viewing his performance negatively. Furthermore, according to media reports, Starmer has privately indicated to close associates his intention to resign, with plans for an orderly departure timeline. However, the exact timing of any announcement remains uncertain, with some senior allies reportedly urging him to wait until after the results of an upcoming by-election are known.
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