Are hedging costs in the options market signalling higher pound risk?

Question

Accepted Answer

Yes, traders are paying more to hedge against pound volatility in the coming weeks.

The options market is signalling higher near-term risk for sterling, with traders willing to pay more to protect themselves against swings in the pound than they were on Friday. That move came as the pound fell 0.2 per cent to US$1.321 on Monday and speculation grew that Prime Minister Keir Starmer could set out a timetable for his departure.
The pound weakened as political uncertainty increased

Sterling has already lost about 3 per cent since pressure on Starmer began to intensify in February. The latest drop followed Friday’s parliamentary win by Andy Burnham, the former Greater Manchester mayor, which increased talk that he could replace Starmer.
Hedging costs rose in the options market

The options market showed traders were prepared to pay more for protection against volatility in the pound over the coming weeks. That is a direct sign that market participants expect sharper moves in sterling than they did at the end of last week.
Investors are watching fiscal policy and the gilt market

Market attention is also fixed on what Burnham would do on fiscal policy, including his choice of Chancellor and whether he would keep the fiscal rules. UK gilt yields were around 4.85 per cent, close to their highest levels since the 2008 financial crisis, and Britain was already paying more for medium-term borrowing than any other developed nation.
Burnham’s stance has not removed investor caution

Burnham has said he would respect Rachel Reeves’ tight fiscal rules, but investors still want proof. Jefferies strategist Mohit Kumar said it was not clear where extra spending would come from, while the firm has stayed underweight sterling and expects further volatility in the UK long end over the coming days.

Reading history

Hide →

This history is cleared when the page is closed.

Are hedging costs in the options market signalling higher pound risk?

Loading

Was this article helpful?

Helpful

Not helpful

Report an issue

1

0

0

Share with friends