Pound Option Bets Signal Return to $1.40 More Likely Than Rally

(Bloomberg) -- Options traders are betting the pound is more likely to fall back to $1.40 in the next month than rally to $1.45, in a reversal of sentiment.

The more bearish outlook comes after U.K. inflation data missed expectations on Wednesday, taking the shine off a rally that took Britain’s currency to its highest level since the Brexit vote on Tuesday. Sterling’s chances of skidding back down to $1.40 within a month are 50 percent, compared to 32 percent for a rise to $1.45, according to options prices indicated by implied volatility data. It was the other way round on Tuesday.

Pound Option Bets Signal Return to $1.40 More Likely Than Rally

The pound fell below $1.42 after the data, yet is still up about 1.2 percent this month, driven by bets on a Bank of England interest-rate increase in May, a weak dollar and seasonal flows traditionally seen in April. Money-market pricing for a rate hike has slipped but remains high at 78 percent, with investors likely to take further profit if the BOE does move on May 10.

“After the May hike is done, we would be more inclined to fade pound strength,” said Adam Cole, chief currency strategist at RBC Europe Ltd.

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