• GBP/USD's weekly risk reversals show the strongest bearish bias in over three years. 
  • Investors are hedging for a surprise election outcome. 

Sterling investors are hedging themselves against a surprise election outcome - Labour victory or hung parliament - which could spell doom for the British currency, risk reversals show. 

On Tuesday, one-week Sterling risk reversals, a gauge of calls to puts, fell to -5.32, signaling the strongest bearish bias since September 2016. 

A negative number indicates the demand or volatility premium claimed by the put options (bearish bets) is higher than that by the call options (bullish bets). 

One-week risk reversals have witnessed a near-90 degree drop from -0.60 to -5.32 over the last 12 days. During the same time period, GBP/USD rose from 1.29 to 1.3215. 

The divergence is unusual and indicates fear among investors that the election outcome could be different than what opinion polls are predicting. 

Prime Minister Boris Johnson's Tory party will win 339 of the 650 seats in the House of Commons, Labour 231, the Scottish National Party 41, and the Liberal Democrats 15, according to YouGov MRP poll. Johnson's lead, however, has recently narrowed sharply. 

Britons are set to vote on Dec. 12. 

Risk reversals


 

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