Pound Rally Before Election Leaves Investors Wary of an Upset

(Bloomberg) --

The higher the pound rises, the more nervous options traders become.

Even as sterling enjoys its longest winning streak since June on optimism Tories will win a majority in next week's vote, a barometer of sentiment and positioning shows options traders are the most bearish on the pound in eight months.

Traders are balancing confidence about a win for Prime Minister Boris Johnson against doubts about opinion polls, which broadly failed to predict the 2016 Brexit vote and the 2017 general election result that stripped the Tories of their majority. Some may also view the Conservatives' victory on Thursday, Dec. 12 as fully priced in.

Pound bulls prefer the ruling Tories both for the prospect of moving on to the next stage of Brexit talks and for their market-friendly policies, in contrast to Labour's pledges to nationalize industries and overhaul the economy.

“The central case seems to be a comfortable Tory win that could keep the GBP/USD supported, moving toward $1.34 and higher,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA. “Investors are hedging their bets ahead of the vote, exploiting the relative cheapness of out-of-the-money dollar calls.”

The cost of hedging against a rise or fall in sterling has surged as the vote looms into view, underscoring lingering concerns about the outcome. Traders are paying 25% more for protection over the next two weeks than at the same point before the snap election in June 2017.

These higher costs also reflect opportunities for pound bulls as the currency is up 3% on the year, compared with 4.5% in the first five months of 2017.

The pound's rally has come at such pace that momentum indicators signal the currency has been overbought. And two-week risk reversals widened to 155 basis points, puts over calls, the most among peers. Sterling traded 0.4% higher Thursday at $1.3152. Key resistance is seen at $1.3168-$1.3185, the midpoint of cable's losses since April 2018 and the high on May 6.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

--With assistance from Charlotte Ryan and Dick Schumacher.

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, William Shaw

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