Pound Traders Are Betting on a Positive Outcome From EU Summit

(Bloomberg) -- Pound traders are turning increasingly bullish on the currency’s prospects into the Oct. 17-18 European Union summit, derivative prices show.

Demand has picked up for options targeting a stronger sterling in the short term -- two-week pound-dollar risk reversals, the premium on bullish options over bearish ones, are set for the highest close since May. The market is moving in spite of stalled Britain-EU talks and Prime Minister Boris Johnson’s reiteration that the country will leave the bloc on Oct. 31 with or without an agreement.

It’s likely the market is preparing for the temporary relief of a delay rather than the more upbeat prospect of a deal. The two-week risk reversal rate remains well below the year’s highs, and overall trader positions are still betting the U.K. currency will decline, signaling only cautious optimism is priced in at this point.

Sterling has slumped more than 17% since Britain voted to leave the bloc in June 2016, and has been a barometer for investor sentiment toward Brexit-related political developments. The currency has rebounded almost 3% from this year’s low of $1.1959 reached early in September, suggesting a decline in market concern that the country will tumble out of the EU without an agreement to avoid economic disruption.

Trades reported by the Depository Trust & Clearing Corp. show that demand for pound call options has lately outweighed that for put contracts by about 50%, while strike prices at $1.2600 and $1.2700 are the most in demand for options that expire within the Oct. 16-21 period. The U.K. currency dropped as much as 0.4% Monday to trim last week’s gains, having formed a bullish candle pattern on the weekly chart -- the so-called bullish harami -- that indicates the pound may extend recent gains in the spot market.

Sterling has remained in a tight range this month as hedge funds and asset managers retain their net short position, according to U.S. Commodity Futures Trading Commission data. Leveraged funds pared such exposure recently while real money investors still prefer to fade rallies, according to three traders in Europe, who asked not to be identified because they are not authorized to speak publicly.

• 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

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

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Anil Varma

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