(Bloomberg) -- Currency traders are shifting focus to sterling as the dollar and the yen lose their luster.
Options trading volumes for the pound versus the euro on the Depository Trust and Clearing Corporation surged on Monday to around 300% above the five-day average, and beat the average again on Tuesday, data compiled by Bloomberg shows.
Interest in the pound is being fueled by shifting rate bets: The Bank of England has said it won’t rush to cut interest rates, a stark contrast to the Federal Reserve and the European Central Bank, which have already started easing. BOE Governor Andrew Bailey reiterated that view on Tuesday.
“Increasingly we are seeing clients take the dollar out of the picture,” says Ruchir Sharma, the London-based global head of FX option trading at Nomura Holdings Inc. He said the pound rising against both the euro and the Swiss franc are among the most popular trade ideas at the moment.
Buying sterling versus other currencies has begun to replace a former popular trade amongst hedge funds of going long the Japanese yen. This comes after a cautious meeting from the Bank of Japan last week, where Governor Kazuo Ueda said the central bank was in no hurry to raise interest rates. His remarks encouraged leveraged funds to cut cash and option positions that would benefit if the currency strengthened, according to traders.
The pound rose Tuesday to its strongest level against the euro since April 2022 and hit an eight-week high against the Swiss franc, although it later lost some of its gains against both currencies.
“With the BOE lagging the developed market central bank easing cycle and the incoming UK data for the most part holding up quite well, at least on a relative basis, expressing a bearish dollar or euro view via sterling makes sense,” says Ray Attrill, the Sydney-based head of FX strategy at National Australia Bank Ltd. However, he warns that sterling is nearing overbought levels, which may limit near-term gains.
The Federal Reserve’s dot plot signaled another 50 basis points of cuts this year, while disappointing eurozone PMI data has spurred swap traders to ramp up bets on a reduction by the European Central Bank in October. The widening interest rate differentials are helping increase sterling’s attractiveness to market participants.
The premium charged by traders to hedge against the euro rising instead of weakening versus sterling over the next month fell to 0.16% on Sept. 24. from 0.24% at the end of last week. The pound’s one-month implied volatility, a measure of its expected future movement derived from options prices, has been increasing this week against both the euro and Swiss franc, amid increasing investor demand for options on the currency pairs.
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