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Traders are most cautious about the pound since 2016 Brexit vote
The UK currency has gained more than 8% against the dollar since June amid speculation a deal will eventually be reached and on a resumption of global risk appetite. The pound fell 8% against the dollar on the day after the Brexit referendum, its largest fall on record.
Option traders haven’t been this pessimistic about the pound since the UK voted to break away from the European Union (EU).
The relative cost of hedging losses in sterling against the euro through the end of December is trading near the highest level since June 2016. Over the week ahead, that premium is the steepest among major currencies and nearly four times its nearest peer, the Norwegian krone.
The increasingly bearish positioning comes ahead of crunch Brexit trade talks later Wednesday. UK Prime Minister Boris Johnson and the European Commission’s Ursula von der Leyen are due to meet in Brussels to break the deadlock before Britain’s transition period to leave the bloc ends on Dec. 31.
With time running out though and after positioning for a breakthrough last weekend, some investors are bracing for a more negative turn. Johnson warned on Wednesday that no British prime minister could accept the EU’s demands.
“It remains highly uncertain whether there will be a deal or not, and the market is unlikely to have priced in the one or the other end result entirely,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “It might well be that the market takes some time to assess how good or bad the result actually is, which could see more muted movements or quick corrections of sharp moves.”
For now at least, the pessimism isn’t spilling over into the spot market. The pound rose as much as 0.8% on Wednesday to $1.3463, its highest level since Friday, helped by broad dollar weakness.
The UK currency has gained more than 8% against the dollar since June amid speculation a deal will eventually be reached and on a resumption of global risk appetite. The pound fell 8% against the dollar on the day after the Brexit referendum, its largest fall on record.
If the UK and EU fail to strike a deal, sterling could fall to $1.25 by the middle of next year, according to a Bloomberg survey last month. ING Bank analysts have warned of a “profound” collapse in sterling, driving the euro-pound pair above 0.95 and possibly to parity, according to a note emailed to clients.
“Sterling is riding a roller-coaster of volatility,” said Sam Cooper, vice president of market risk solutions at Silicon Valley Bank. “While there is plenty of opportunity for short-term gains for participants willing to take intraday positions, the long-term direction remains in the balance.”
