**GBP/USD Options Traders Turn Bearish on Pound as BOE Rate Cut Bets Rise**
*By Naomi Tajitsu, Bloomberg*
The pound is facing renewed bearish sentiment in the options market as traders step up bets on interest-rate reductions by the Bank of England (BOE). Volatility is spiking, skew is turning more negative and risk reversals continue to signal a strong demand for downside protection — all pointing to mounting skepticism over sterling’s prospects against the US dollar.
**Rising Rate Cut Expectations**
At the heart of the shift is the widespread anticipation that the BOE will soon begin to lower borrowing costs, a stark change after a prolonged period of aggressive monetary tightening to combat inflation. Recent data releases have reinforced expectations that UK inflation is cooling rapidly, giving the central bank room to act as early as its next policy meeting.
– UK inflation has slowed quicker than forecast.
– Money markets now price over 60 basis points of BOE rate cuts by year-end.
– Some strategists see the first cut as soon as August.
The difference between the BOE’s stance and the Federal Reserve’s more cautious approach is putting pressure on the pound. While US inflation data and Federal Reserve commentary have led traders to significantly reduce expectations for imminent US rate cuts, the UK economy’s softness is leaving the door wide open for BOE action.
**Options Market Signals Sour Sentiment**
Options traders — who hedge or speculate on large currency moves — have been quick to respond to the shifting outlook. There has been a pronounced tilt in favor of put options, which pay off if GBP/USD falls, while premiums for calls have dropped sharply.
Key points in the options market include:
– The three-month GBP/USD risk reversal, which measures the cost of protection against pound falls versus gains, slumped this week to its lowest in over a year.
– Fresh demand for puts on shorter maturities, indicating traders see risks tilted to the downside heading into the summer.
– Implied volatility has climbed, reflecting expectations of choppier trading.
These trends underscore the sharp turnaround after months in which the pound had been buoyed by the BOE’s hawkish bias and a perception of UK economic resilience. Now, with macro data deteriorating and policy set to ease, traders are bracing for further weakness.
**Pound’s Dollar Struggle**
As a result of these dynamics, the GBP/USD pair has fallen back from its 2024 highs, with the dollar strengthened by continued US economic outperformance. The greenback’s rally adds another layer of challenge for sterling, especially with traders increasingly convinced that the Federal Reserve will keep rates at elevated levels for longer than previously thought.
– GBP/USD has dropped more than 2 percent from recent highs.
– The pair is trading around 1.2650, close to multi-month lows.
On the technical front, analysts note the setup now favors the dollar, with key support levels for the pound under threat. As downside momentum builds, some are watching for a potential move toward the 1.2500 level.
**BOE Policy Path in Focus**
With political uncertainty receding after the UK general election, attention is squarely back on the BOE and its response to the softer trajectory for growth and inflation. Several members of the Monetary Policy Committee have signaled that the time for easing may be near, though some caution against pre-emptive moves.
– BOE Governor Andrew Bailey has noted that progress against inflation has been significant and hinted the MPC could vote for a cut “in the coming months.”
– Investors will be looking keenly at wage growth, services inflation, and next week’s employment numbers for guidance.
For now, the bias is clear. Markets are increasingly aligned behind the view that British rates will drop before those in the US, narrowing the pound’s yield advantage and diminishing support for sterling flows.
**Global Context Adds to Pressure**
It is not only domestic factors weakening the pound. A broader recalibration of global interest rate expectations is also eroding support
Read more on GBP/USD trading.