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Options data shows the most bearish repricing in GBP/EUR risk reversals since the pre‑budget period.
The pound to euro exchange rate (GBP/EUR) loses further value on Tuesday as traders price in ongoing UK political uncertainty.
The conversion is down a futher 0.25% down the day at 1.1464, putting it some 20 pips shy of the Monday low at 1.1444.
The pair stabilised on Monday afternoon after Starmer's cabinet publicly backed the Prime Minister and staunched the building momentum against him. However, the lack of follow-through upside in pound sterling suggests lingering concern.
Sterling has been under pressure since last week due to fears that Prime Minister Keir Starmer is running out of road and will eventually be replaced.
The Bank of England also delivered a 'dovish' policy update on Thursday, which signals more rate cuts ahead, an adjustment that would weigh on the pound regardless of politics.
Given these developments, demand for options protection has increased, a clear signal that traders are concerned about the longevity of Starmer's premiership and the fear that he will be replaced with a more left-wing leader.
"Reminiscent of the pre‑budget sterling dark days, GBP/EUR remains the clearest channel through which the market is expressing sterling’s risk premium tied to rising political uncertainty," says Antonio Ruggiero, FX & Macro Strategist, Convera.
"Heavier spot selling this month is now joined by the most bearish repricing in GBP/EUR risk reversals across tenors since the pre‑budget period. The shift suggests investors are willing to pay the highest premium to hedge against GBP weakness versus euro strength since then," he adds.
Above: GBP/EUR breaks below the 50-day simple moving average, a potentially significant technical development that augurs for further losses.
Consensus projections for the next four quarters, compiled from leading investment banks.
Access the full forecast →
Options protection is being used because investors see rising downside risk in GBP/EUR.
Selling spot GBP/EUR requires timing and commitment, but buying options allows investors to express concern about future GBP weakness while keeping upside open if the political or policy risks do not crystallise.
Ruggiero explains that the market positioning indicates investors may be eyeing more structural disruptions into this month’s by‑election and May’s state election before committing to heavier selling.
"On the fundamentals side as well, one can argue that the BoE’s dovish tilt will crystallise only once inflation, still at 3.4%, starts to move lower, since it heavily hinges on that deflationary trajectory," says Ruggiero.
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