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Investors are the most bearish on the pound since the UK voted to leave the European Union as markets brace for the possibility of a no-confidence vote on Prime Minister Theresa May.
The premium to buy put options on the currency relative to calls is the steepest since June 2016, with the Sunday Times reporting that seven leading Conservative lawmakers are preparing campaigns to oust her. A confidence vote could come as soon as Tuesday, the newspaper said.
The pound declined more than 1% last week after several of May’s ministers quit in disagreement over her Brexit divorce deal with the EU. The political turmoil has opened up a multitude of risks for sterling, including the prospect of new elections or even a second referendum.
Should May manage to stay on, she will still have a challenge getting her Brexit deal - which leaves the UK tied to the European Union’s customs union - through Parliament. RBC Capital markets said last week that the best and worst-case scenarios could lead to a 10% swing in the currency.
Weekend news reports:
- Seven Conservatives including Boris Johnson, David Davis and Dominic Raab are gearing up campaigns to challenge May, according to the Sunday Times newspaper May says there is “no alternative plan on the table,” in a column she wrote in The Sun newspaper.
- Slightly less than half of British adults want May to remain in her job, according to a poll by ComRes published by the Sunday Mirror and Sunday Express.
- The pound was at $1.2834 at Friday’s close. Against the euro, it was worth 88.96 pence, having slumped 1.8%.
- “The risk of a no-deal Brexit is greater than the wider market appears to be pricing in,” said John Goldie, a London-based broker at Argentex, referring to the possibility of no-deal. The currency could still drop to parity with the euro by March, he said.
- The cost of one-month put options on the pound relative to call options reached 236 basis points, compared with a premium of 68 basis points just a week earlier.
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