Dollar and yen lose their luster, pound becomes the "new favorite" for arbitrage traders.

As the dollar and the yen lose their shine, forex traders are turning their attention to the pound. Compilation data shows that on Monday, the pound to euro options trading volume at the US custodian trust and clearing company saw a surge, about 300% higher than the five-day average, and again exceeded the average on Tuesday. The shifting interest rate bets are driving investors' interest in the pound: the Bank of England has indicated it will not rush to cut interest rates, a stark contrast to the already easing policies of the Federal Reserve and the European Central Bank. Bank of England Governor Bailey reiterated this view on Tuesday. Ruchir Sharma, Global Head of FX Options Trading at Nomura Holdings in London, said, "We are seeing more and more clients pulling out of trading the dollar." He stated that betting on the pound against the euro and the Swiss franc appreciating is currently the most popular trade. Buying the pound against other currencies is starting to replace the previously popular trade in hedge funds of going long on the yen. In a cautious meeting last week, Bank of Japan Governor Kuroda stated that the central bank is not in a rush to raise interest rates. Traders say his comments encouraged leveraged funds to cut cash and options positions, which would benefit if the pound strengthens. On Tuesday, the pound to euro exchange rate rose to its highest level since April 2022, and the pound to Swiss franc rate also hit an eight-week high, but later both pairs saw some pullback. Ray Attrill, Head of FX Strategy at National Australia Bank in Sydney, said, "Given the Bank of England lagging behind the easing cycle of developed market central banks, and upcoming UK data largely holding up, at the very least, there is a reasonable case to express a bearish view on the dollar or euro via the pound." However, he warned that the pound is approaching overbought levels, which could limit short-term gains. According to the latest dot plot, the Fed is expected to cut rates by another 50 basis points this year, while weaker than expected euro area PMI data has led derivative traders to increase bets on an October rate cut by the European Central Bank. The widening interest rate differentials will help increase the attractiveness of the pound to market participants. On September 24, traders hedged against a future month of euro strength versus weakness relative to the pound saw a premium drop to 0.16%, compared to 0.24% over the weekend. The one-month implied volatility for the pound against the euro and the Swiss franc has been rising all week as demand for options on these pairs continues to increase.