Hedge funds and asset managers increased bearish bets against the pound last week, with option markets showing a sharp rise in demand for downside protection, according to a report by Bloomberg citing data the DTCC and CME.
The moves came amid amid renewed political uncertainty linked to Greater Manchester Mayor Andy Burnham potential return to parliament.
Trading data indicated a significant imbalance in derivatives activity, with sterling put options against the dollar far outweighing call volume across mid-May sessions. The flow suggests investors are increasingly positioning for further weakness in the UK currency.
The shift in sentiment followed Burnham’s move to position himself for a potential parliamentary run, a necessary step if he were to pursue a future leadership challenge. Markets interpreted the development as raising the risk of greater political instability and a looser fiscal stance, including the possibility of higher public spending and increased gilt issuance.
The pound slipped for a sixth consecutive session, reaching its weakest level in more than five weeks against the US dollar as political concerns compounded existing macro pressures.
Derivatives activity reflected the change in tone. Demand for sterling downside protection surged, with put option volumes significantly outpacing calls on contracts referencing at least £100m in notional exposure. Measures of activity on major trading platforms also showed elevated hedging demand, reaching the highest levels seen since early 2024.
Bank trading desks described a clear shift in positioning. At Bank of America, FX options traders noted increased demand from both short-term and longer-term investors seeking protection against further sterling weakness. Similarly, RBC Capital Markets reported a move in cash positioning from neutral to modest net short exposure over the course of the week.
Broader market commentary from Nomura Holdings highlighted that investors were actively selling the pound against the dollar, while showing more restraint in positioning against the euro, suggesting selective rather than uniform bearishness.
Attention is also turning to upcoming UK political milestones, including a by-election in June, with traders increasingly focused on options expiring around that event window. Pricing in derivatives markets indicates a rising premium for downside protection versus upside exposure, signalling growing concern about near-term volatility.
Alongside domestic political uncertainty, currency traders also pointed to external factors supporting the US dollar, including higher energy prices and broader risk aversion linked to geopolitical tensions, which have added further pressure on sterling.
