Pound Sterling Hit by Options Market Action

Image © Moonrise, Adobe Stock

Pound Sterling has turned lower ahead of a key moment in any market's life-cycle: the expiry of billions of pounds worth of options.

This is a technical phenomenon that tends to be disassociated with the normal, fundamental drivers behind a currency and thus adds a bit of mystery to moves in the currency market.

Indeed, Sterling's strong start to the week has given away to losses against both the Euro and Dollar. At the time of writing the Pound-to-Euro exchange rate is quoted at 1.1349 having been as high as 1.1399 earlier in the day. The Pound-to-Dollar exchange rate is at 1.3963 having been as high as 1.4069.

Mike Paterson at Forexlive has been monitoring Sterling with regards to key options expiries and he says a large expiry today at 1.4000 in GBP/USD could be at play.

The value of options due to expire today are set at £2.3BN and Paterson believes the expiry had earlier "helped push the pair higher in thin Asia trading conditions with a defence at 1.4020 following".

"I warned in an earlier post that we shouldn't rule out an attempt by the sell-side closer to expiry time and bingo, here we are at 1.3882 with longs being squeezed out and/or running for cover," says Paterson.

Paterson notes some general USD demand helping "but that's not the whole reason here by a long way as a quick flick through EURGBP, GBPJPY, GBPCHF et al will show. As I've said oft before ignore these expiries at your peril whether you believe in the potential impact or not."

"Remember these are vanilla options and in play right up until expiry even if breached in the meantime unlike barrier options which cease to be once broken," says Paterson.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.