The Pound remained stable on Tuesday, while options for Sterling reached their highest levels since the beginning of the month, indicating some anxiety among traders ahead of UK finance minister Rachel Reeves' budget.
The overnight implied options volatility, which gauges the demand for protection against imminent price fluctuations, increased to 8.63% for Sterling, the highest since 9th October. Meanwhile, Euro/Sterling options volatility also rose, reaching 5.33%, the highest level since 19th September.
The Pound remained steady at $1.297, poised to record its first monthly decline since September 2023, having fallen approximately 3%, Reuters reports.
On Wednesday, Reeves will present the new Labour government's first budget in 14 years, following the bond market crisis triggered by former Prime Minister Liz Truss' tax-cutting proposals two years ago.
According to government sources, she intends to implement approximately £40 billion in fiscal measures, primarily through tax increases and reductions in certain public services, to fulfil her commitment to finance day-to-day spending without borrowing.
ING strategist Francesco Pesole noted that there is currently no political risk premium factored into the Pound, whilst speculators hold a significant bullish position in Sterling futures, which could be rapidly reversed if the budget does not meet expectations.
“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 lead-up to Truss's finance minister presenting the budget in 2022, overnight implied options volatility for Sterling approached 30%.
In contrast, global asset managers are currently relatively optimistic about UK government bonds, which were among the hardest hit by Truss's "mini-budget" in September 2022.
While the UK has experienced modest yet steady economic growth and a continuing decrease in inflation, the Bank of England has only implemented one rate cut this year.
Markets anticipate at least one additional cut before the year ends, but the BoE is expected to be among the slower major central banks in reducing borrowing costs, which has provided some support for the Pound throughout the year.
Furthermore, Sterling remains the top-performing major currency against the Dollar in 2024, boasting nearly a 2% gain. In comparison, the Chinese Yuan, the second-best performer, has declined by 0.5% against the US Dollar in the offshore market.