Traders are increasingly betting that the upcoming Budget announcement will lead to a decline in the value of the pound against the dollar, driven by concerns over Chancellor Rachel Reeves’ proposed tax-raising measures, which could further harm the UK’s fragile economic growth. Recent trading data reveals an overwhelming shift towards put options—contracts that speculate on or provide protection against a fall in the pound—outpacing bullish call options by a ratio exceeding four to one, as reported by derivatives firm CME Group.
Dominic Bunning, the head of G10 FX strategy at Nomura, emphasized that the surge in put options indicates a market bracing for a difficult outcome regarding the pound’s stability. The backdrop to this apprehension includes underwhelming economic growth figures and a dip in inflation, prompting traders to focus on potential interest rate cuts. Such cuts would diminish the currency’s appeal to investors.
Currently, the pound is hovering near its lowest levels against the dollar since April, around $1.30. Market sentiment suggests that the Budget could amplify pressures on sterling if Reeves’ fiscal strategies do not resonate well with investors already wary of unsustainable government borrowing and the opposition Labour Party’s capability to achieve its economic goals. Mark Dowding, fixed income chief investment officer at RBC BlueBay Asset Management, pointed out the inherent challenges in Reeves delivering a budget that favors UK growth, which in turn supports the pound.
Among various strategies, Dowding has been anticipating that the pound will weaken both against the euro—where it recently recorded its lowest value in over two years—and against the dollar, primarily through the use of currency forwards. Some investors are also looking for measures that might actively decrease inflation, such as reducing value-added tax on energy costs. Such actions could further weaken the pound by paving the way for quicker interest rate reductions from the Bank of England.
Analysis from CME Group indicates that put options set to expire on Budget day are significantly more expensive than their call counterparts, illustrating traders’ expectations of potential sterling weakness as a result of the tax proposals. This sentiment mirrors market behaviors observed during other turbulent times, notably when traders predicted sterling vulnerabilities surrounding significant political events.
Chris Povey, head of FX options at CME Group, noted the heightened activity in trading sterling puts, underscoring the prevailing cautious outlook. However, analysts like Kamal Sharma from Bank of America maintain that if Reeves can articulate a credible fiscal strategy that alleviates fears of future tax increases and provides optimistic growth forecasts, it could result in a rally for the pound.
The Budget is viewed as a pivotal moment for the currency, deemed by some as the “single most significant binary event of the year” for sterling. Yet, concerns regarding government debt levels persist, particularly in light of uncertainty surrounding Reeves’ ability to generate revenue without raising income taxes, following a notable policy reversal earlier this month.
Bunning echoed these sentiments, cautioning that without visible fiscal consolidation and increased credibility, there exists a real danger that the pound could experience a downturn mirroring trends with long-dated government bonds, an association that has become more frequent in recent times. He highlighted recent declines in sterling assets attributed to worries about potential challenges to Prime Minister Sir Keir Starmer’s leadership from within the Labour Party.
Analysts like Steve Englander, head of FX research at Standard Chartered, reflected a broader pessimism regarding the outlook for the UK economy, criticizing its overall dynamism, high levels of government expenditure, and limited avenues for revenue growth given political commitments against tax hikes.
