Currency traders are increasing their bets against sterling ahead of Wednesday’s Budget release, fearing Rachel Reeves’ tax and spending plans could further weaken Britain’s already fragile economic outlook.
Data from CME Group shows that trading volumes in put options – contracts that benefit from a fall in the pound – have outnumbered bullish call options by more than four to one over the past week. The rise suggests investors are bracing for a budget that could push sterling lower.
Dominic Bunning, head of G10 FX strategy at Nomura, said the pattern “points to a market well positioned for a difficult outcome for the pound.”
The pound, already near its weakest level against the dollar since April, traded at $1,312 on Tuesday after weeks of weak economic data and falling inflation encouraged traders to price in earlier Bank of England interest rate cuts – usually a drag on a currency.
Investors fear Reeves’ expected tax hike package will cloud growth prospects or undermine confidence in the government’s ability to manage its fiscal position. Some fear a poorly received budget could put political pressure on the Labor leadership, causing further volatility.
Mark Dowding, chief investment officer of fixed income at RBC BlueBay, said it was “hard to see how Reeves delivers a result that appears optimistic for British growth,” adding that he had bet on further weakness in sterling against the euro and dollar.
Traders are also speculating that Reeves could introduce measures to curb inflation – such as a cut in VAT on energy bills – which could increase expectations of interest rate cuts and further weigh on the pound.
CME data shows sterling puts expiring on Budget day are significantly more expensive than calls, a sign that markets believe sterling weakness is more likely than strength. The price difference is at its highest level since January, as traders anticipated volatility surrounding Donald Trump’s inauguration.
Chris Povey, head of FX options at CME Group, said: “We are seeing people trading sterling puts more intensively.”
But analysts note that a well-received budget – which creates fiscal space and reassures markets about next year’s tax plans – could spark a recovery rally in the currency. Kamal Sharma, director of G10 foreign exchange strategy at Bank of America, described the budget as “the most significant binary event of the year for sterling.”
But others warn that the pound remains vulnerable to concerns about high government debt, limited revenue sources and political uncertainty.
“If the market doesn’t see enough signs of fiscal consolidation and credibility,” Nomura’s Bunning said, the pound could fall along with long-term government bonds – a pattern seen more frequently in recent years.
Steve Englander, head of foreign exchange research at Standard Chartered, said the mood in Britain remained gloomy. “I haven’t heard anyone say good news about sterling or the U.K. in the last three months,” he said, citing the economy’s lack of dynamism, high spending and limits on tax increases.
