No Respite for Pound as Risk Reversals Signal More Pain in Store

(Bloomberg) -- Option traders are bracing for more pound losses as the U.K.’s domestic economics and politics provide little reason to buy the currency.

Risk reversals in sterling are now near the most bearish in more than a month. In the spot market, the pound has fallen 0.8 percent this month, the worst performance after the Australian dollar and Norway’s krone among Group-of-10 currencies.

With markets increasingly looking at the Bank of England’s Nov. 2 interest-rate increase as a one-and-done move, the British currency is no longer supported by expectations for immediate monetary tightening. That has left it vulnerable to underwhelming U.K. data and uncertainty surrounding Brexit.

The three-month risk reversal covers the Dec. 14-15 European Union summit, where it looks increasingly unlikely that the EU will be ready to discuss trade with the U.K., with the two sides remaining miles apart on contentious issues such as the Brexit bill. That means trade talks could be pushed to March, just 12 months before Brexit takes effect in 2019.

“Due to a lack of momentum from other sources sterling remains at the mercy of the slow-moving Brexit negotiations,” said Antje Praefcke, a senior currency strategist in Frankfurt at Commerzbank AG. “The reaction to the dwindling chances of an agreement between the U.K. government and the EU illustrated just how sensitively sterling reacts. Whichever way one looks at it, I really see no reason to buy sterling.”

Add the lingering uncertainties about Prime Minister Theresa May’s political future into the mix and it’s hard to see any viable signs of a recovery in the pound.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma

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