LONDON: The pound edged lower on Monday, with investors holding on to their hedges against further weakness ahead of the result of the Conservative party's leadership election on Tuesday, which will decide Britain's next prime minister.
Market participants have been buying more options to protect against losses in sterling since early May and have consolidated their positions in the past few days, according to three-month sterling risk-reversals, which measure demand for buy and sell options on the British currency.
Three-month implied volatility in the pound has risen since the beginning of the month and has hit its highest since early April, signalling traders are expecting more swings in sterling as a new prime minister takes over before Britain's scheduled Oct. 31 departure from the European Union.
Moreover, "sterling shorts have grown further and are moving in line with both EUR/GBP and GBP/USD," said Kit Juckes, macro strategist at Societe Generale.
The pound was last down 0.2% at $1.2486, having declined 1.6% against the dollar so far this month. Against the euro, it was slightly lower at 89.890.
The last votes to choose a new Conservative party leader are expected to be handed in on Monday, followed by an announcement on Tuesday.
Eurosceptic former foreign minister Boris Johnson is the favourite to win the contest.
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