GBP/USD has gained more than 400 pips in the last 2.5 weeks, but investors are likely expecting Sterling to surrender these gains in the near-term
Three-month risk reversals on GBP (GBP3MRR), a gauge of calls to puts on the British currency, is currently seen at -2.475, the lowest level since Dec. 14, having clocked a high of -1.70 on Jan. 14.
The sharp slide from -1.70 to -2.475 seen over the last 2.5 weeks indicates the investors have added bets to position for weakness in the pound.
Interestingly, GBP/USD picked up a strong bid at lows below 1.27 on Jan. 14 and printed highs above 1.3218 last Friday. Clearly, the spot and the risk reversals have moved in the opposite directions.
That divergence could be a warning of an impending bearish reversal in GBP/USD.
GBP3MRR and GBP/USD comparison chart