Political turmoil in Westminster is prompting traders to intensify bearish bets against sterling, as investors brace for a potentially prolonged period of uncertainty following the launch of the Labour leadership contest.
Data from trading platform IG Group showed that 57 per cent of sterling trading volume earlier this month was made up of short positions, underlining persistent concern over the UK’s political and economic outlook.
The figures, which form part of IG’s new weekly Sterling Sentiment Tracker, suggest the pound has become an increasingly popular vehicle for investors seeking to hedge against domestic political instability. Bearish sentiment has remained elevated for several weeks, with short positioning peaking at 70 per cent of GBP/USD trading volume three weeks ago.
Sterling trading volume is picking up
At the same time, trading activity linked to sterling has surged sharply. Total GBP/USD trading volumes – encompassing both long and short positions – rose almost 80 per cent in mid May compared with recent averages, highlighting how political developments are fuelling volatility in currency markets.
The data also pointed to a divergence between overall trading activity and the behaviour of individual investors. While aggregate trading volumes skewed decisively bearish, client sentiment on a per-person basis was evenly balanced, with 50 per cent of traders taking long positions and 50 per cent taking short positions during the week.
The number of individual sterling trades painted a more negative picture, however, with 61 per cent of transactions positioned against the pound.
Market participants have increasingly focused on the implications of the Labour leadership race for fiscal policy, economic credibility and the stability of the next government. Investors remain wary that a prolonged contest, or the emergence of a leadership candidate perceived as less fiscally conservative, could add pressure to UK assets.
“The pound is often the market’s first pressure point when confidence in the UK outlook starts to deteriorate,” said Chris Beauchamp, chief market analyst at IG.
“Now that the Labour leadership contest is underway, traders are leaning bearish on the pound as uncertainty over the UK’s political and economic direction intensifies,” he said. “Markets are clearly concerned that whoever ends up in Number 10 in the coming months could be governing from a weakened position, or may be seen as less committed to fiscal discipline than their predecessor.”
Currency strategists have long viewed sterling as particularly sensitive to shifts in political confidence, owing to the UK’s dependence on external financing and the international role of London’s financial markets. Episodes of domestic instability – from the Brexit referendum to the 2022 gilt market turmoil – have previously triggered sharp moves in the pound.
