Pound Watchers Signal That Only the BOE Can Shift the Market

(Bloomberg) --

After two years of bearishness in pound options, traders are turning neutral over the currency’s trajectory.

Sterling fell after the release of better-than-expected U.K. data, failing to sustain a rally that sent the pound to its highest in more than two weeks. A gauge of market sentiment and positioning suggests investors see balanced risks for the currency over the coming three months.

“It’s a waiting game now,” said Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets. “It’s unclear whether the Bank of England’s Monetary Policy Committee will think that enough easing has already been baked in by the January decline in pound rates, or that it will think this easing will need to be reinforced with a rate cut next week.”

Pound Watchers Signal That Only the BOE Can Shift the Market

Sterling rose as much as 0.4% to $1.3173 after U.K. purchasing managers’ index data beat forecasts, while money market pricing for an interest-rate cut on Jan. 30 now stands at around 59%.

The market was positioned for an even more upbeat PMI number, which prompted profit taking and short-term selling, according to a Europe-based trader. Hedge funds are betting on the pound going in either direction at current levels, another trader in the region said, who asked not to be identified because he is not authorized to speak publicly.

Three-month risk reversals in cable trade at just six basis points in favor of pound downside exposure, as bearish sentiment in the currency stands at its lowest since January 2018.

  • 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

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