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Pound traders are betting on the currency to fall in coming months given the political risks from a December election, even after the Brexit Party said it will avoid contesting seats held by the ruling party.
The U.K. currency has rallied more than 1% in the past month after Prime Minister Boris Johnson’s Brexit deal and as his Conservative party retains a lead in opinion polls. While it gained further ground this week on Nigel Farage’s pledge to avoid competition, in options markets investors remain cautious and continuing to expect weakness.
“That probably still tells us the market is yet to be convinced that the Conservatives are on course for a solid majority next month,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “Despite the opinion poll lead, the scale of voter switching over the last two elections, allied to the prospect of tactical voting, means that the electoral outcome is very hard to predict at this point with any degree of certainty.”
The pound has acted as a barometer for risk in the three-year Brexit process and the result of the election will determine the path for the U.K.’s exit from the European Union. Markets are still cautious of the vote ending in no clear majority or a coalition led by the opposition Labour party, which could lead to further Brexit negotiations with Brussels or another referendum.
Risk reversals, a measure of options market sentiment and positioning, favor selling the pound at contracts from one month to one year. The latest data from the Commodity Futures Trading Commission shows investors continue to have short positions on the currency, though have trimmed these, which could leave the currency more vulnerable to a slump if sentiment turns more negative.