Smart Money Insuring Against More Pound Losses Against Euro

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File image of Ed Miliband. On Tuesday, he urged PM, Starmer, to take the government in a leftward direction. Picture by Dan Dennison / DESNZ, copyright: Gov.uk.

Institutional investors are stepping up efforts to protect against further pound losses, as political risk and shifting monetary expectations weigh on pound sterling.

The pound to euro exchange rate extended its selloff through Tuesday, slipping below its 50-day moving average to trade at 1.1467.

That break is technically significant, as confirmed moves below the 50-day average often signal that a previous rally has run its course.

In this case, the post-budget rebound now appears to have ended, with price action tilting the near-term balance of risks to the downside.

Immediate political pressures on Prime Minister Keir Starmer look to be easing, after he secured cabinet backing and with little appetite within the Labour Party for a leadership change ahead of May’s local elections.

However, senior Labour figures including Ed Miliband and Andy Burnham are urging the Prime Minister to learn from the episode and turn his government leftward.

Such a drift risks unsettling markets by raising questions over fiscal discipline and reform momentum, reinforcing expectations of further sterling weakness.

Those with upcoming GBP money transfer requirements may wish to consider locking in current exchange rates to protect budgets against further downside. (Learn how here).

Institutional investors appear to be doing just that. Institutional investors with billions worth of exchange rate exposure need to protect their investment holdings against a weaker pound.

Data from the options market show increased demand for downside protection in GBP/EUR, indicating that large holders of sterling exposure are actively hedging against further losses.

The cost of insuring against a weaker pound has risen sharply, reflecting heightened political concerns and a more dovish tone from the Bank of England.

"GBP/EUR remains the clearest channel through which the market is expressing sterling’s risk premium tied to rising political uncertainty. 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," says Antonio Ruggiero, FX & Macro Strategist at Convera.

Strategists at Nomura are also leaning into the move.

“We have raised the conviction on our long EUR/GBP trade to 5/5,” says Dominic Bunning, FX strategist at Nomura.

That trade targets a move in EUR/GBP to 0.8950, which implies a GBP/EUR level of 1.1173, pointing to further room for sterling to weaken if current pressures persist.