LONDON: The pound held steady on Tuesday, while sterling options rose to their highest since the start of the month, reflecting a modest degree of nervousness among traders a day before UK finance minister Rachel Reeves presents the new budget.
Overnight implied options volatility, a measure of demand for protection against very near-term price swings, rose to its highest for sterling since Oct. 9, at 8.63%, while for euro/sterling options, it touched its highest since Sept. 19, at 5.33%.
The pound itself was last unchanged on the day at $1.297, on course for its first monthly loss since September 2023, down around 3%. Reeves will deliver the new Labour government’s first budget in 14 years on Wednesday, two years after then-Prime Minister Liz Truss’ tax-cutting plans sparked a crisis in the bond market.
She plans around 40 billion pounds ($52 billion) worth of fiscal measures, according to government sources, mostly from tax increases plus cuts to some public services, to meet her pledge to cover day-to-day spending without borrowing.
ING strategist Francesco Pesole said there was no political risk premium priced into the pound right now, while speculators are sitting on a fairly substantial bullish position in sterling futures, which could quickly get unwound if there is any disappointment stemming from the budget.
“Sterling continues to look vulnerable ahead of tomorrow’s budget event and next week’s US election, and risks remain skewed to a move to $1.2800-1.2850,” he said.
In the run-up to Truss’ then-finance minister presenting the budget in 2022, overnight implied options volatility for sterling hit nearly 30%.
Sterling pinned near one month low after GDP data
Meanwhile, global asset managers are also relatively sanguine towards UK governments bonds - one of the biggest casualties of the Truss “mini budget” in September 2022.
Modest, but steady economic growth, along with a continued decline in UK inflation have reaped only one rate cut so far from the Bank of England this year.
Markets are priced for at least one more before the end of this year, but the BoE is expected to be one of the slower major central banks when it comes to lowering borrowing costs, meaning the pound has enjoyed a degree of support this year.
Sterling is still the best-performing major currency against the dollar in 2024, with a near 2% gain, compared with runner-up, the Chinese yuan, which in the offshore market, is down 0.5% against the US currency.
With the US presidential election just a week away, and the outcome too close to call, analysts have said many investors are unwilling to lay on large new trades.