* Traders eye FTSE 100 underperforming Europe
* Buy FTSE puts, Euro STOXX 50 calls, traders say
* Sterling hitting highs against euro
* Euro could weaken further on fresh ECB stimulus
By Sudip Kar-Gupta
LONDON, April 17 (Reuters) - Market bets are growing that Britain's main stock index, laden with heavyweight exporters, will stall as divergent central bank policies strengthen the pound against the euro.
An economic rebound that is strengthening Britain's jobs market could prove a mixed blessing for the FTSE 100. It raises the risk of higher interest rates making pound-priced exports more expensive - just when the threat of deflation may force the European Central Bank to take steps that would weaken the euro.
While investors question how much longer the Bank of England can keep its benchmark rate at a record low of 0.5 percent, the ECB - whose main rate is just 0.25 percent - opened the door this month to creating money through quantitative easing (QE).
Some strategists and derivative traders are now betting against the FTSE and on a rebound in shares in the euro zone, whose exporters might finally enjoy some currency weakness if the ECB acts decisively to bring inflation back up towards its target of just below 2 percent.
Sterling touched its highest level since late 2008 against a basket of currencies on Thursday, trading at $1.6835 and 82.18 pence per euro.
The FTSE is down around 3 percent so far this year, while the Euro STOXX 50 - the most liquid European index for options traders - is up around 1 percent.
"Because of the pound's strength, we believe it will be difficult for the FTSE to rally above previous highs. We don't think there will be any QE in the UK in 2014," said Gerry Fowler, global head of equity and derivatives strategy at BNP Paribas.
"However, we do think the ECB will do QE this year. The ECB has two priorities - getting credit to SMEs (small and medium-sized enterprises) and ensuring the euro doesn't strengthen, and preferably weakens, which on both fronts we think is supportive of European equities."
Fowler backed buying a December "put" option on the FTSE with a strike price of 6,900 points - giving the right to sell the FTSE at that level in December and essentially making a bet on the FTSE not rising above that level by then.
Mike Turner, European equity options broker at XBZ Ltd, advocated selling a June "call" betting on the FTSE rising while buying a "put" to bet on it falling, and doing a reverse for the Euro STOXX 50.
Societe Generale derivatives brokers also said clients had been buying "calls" to play on the Euro STOXX 50 rising and outperforming the FTSE on expectations of the ECB being more dovish than the Bank of England.
"Long-term call options are quite cheap at the moment on the Euro STOXX, and we have seen some clients buying them up," said Delphine Leblond-Limpalaer, equity derivatives specialist at Societe Generale Corporate & Investment Banking.
(Editing by Blaise Robinson/Ruth Pitchford)
- Market Movers
- Euro STOXX 50
- FTSE 100