Forex options less bearish on sterling against dollar

The Bank of England is expected to unveil plans later in the week to print billions more pounds in order to drive growth, but that hasn’t prevented investors from becoming less pessimistic regarding the currency’s prospects against the US dollar.

Risk reversals reveal that options investors are still hedging their bets on the pound weakening versus the dollar, although they have been trimming those bearish positions, particularly given the eurozone summit deal last week.

The sterling rallied towards the end of last week as a European leaders’ agreement on measures to limit weaker eurozone countries’ borrowing costs boosted gains in currencies widely viewed as riskier.

Paris-based Societe Generale fx strategist Sebastien Galy said that they anticipate that demand for the sterling will pick up again during the weeks ahead as an alternative option to the euro. He added that sterling valuation and worsening economic data were probably key to pricing changes relating to sterling/dollar risk reversals last month.

Three-month risk reversals for the sterling/dollar show a clear bias for puts (the right to offload sterling) trading around 1.8 per cent today. This is towards the high end of the range of between one to 1.8 per cent they were during the opening five months of 2012, but down from 2.3 per cent last week and an almost six-month peak of 2.7 per cent early last month.