Hedge funds have stepped up bearish positioning on sterling as political uncertainty in the UK escalates and expectations for monetary easing build, according to a report by Bloomberg citing market data and dealer commentary.
The pound slid to a two-week low against both the euro and the dollar on 5 February, weighed down by concerns over Prime Minister Keir Starmer’s grip on power and a closely split Bank of England rate decision that came within one vote of a cut. Pressure intensified over the weekend after Starmer’s chief of staff resigned, deepening the political crisis.
Options markets show investors are increasingly using the euro as the preferred vehicle to express UK-specific risk. Demand for protection against a near-term decline in sterling versus the euro rose to its highest level since late November, while trading volumes in euro-sterling options jumped to their highest since 2019, according to DTCC data.
Positioning has been heavily skewed toward further pound weakness. Call options that profit from a weaker sterling accounted for roughly 50% more volume than bullish put options on the same day, with dealers reporting strong demand for euro-sterling “topside” exposure. One-month implied volatility has climbed to its highest level since December, reflecting heightened expectations of near-term swings.
Banks and hedge fund strategists remain cautious on the outlook for sterling. Goldman Sachs forecasts a 6% decline against the euro over the next 12 months, while Nomura expects a further 3% fall by the end of April. RBC Capital Markets said demand for hedges rose sharply even before the latest political developments, pushing implied volatility higher.
Market participants are also positioning for tail risks with recent data showing growing interest in options that would pay out if euro-sterling moves above 0.90 — a level last seen in 2022 — particularly in contracts expiring later in the year. While UK local elections in May remain a focal point, elevated activity in April contracts suggests investors are hedging against the risk of an earlier leadership challenge.
With sterling already down more than 5% against the euro last year, traders say the currency has begun to trade with emerging-market-style volatility, driven by sensitivity to political headlines and global dollar strength.
