LONDON:Traders are turning pessimistic on the outlook for the pound, already at its lowest in months, amid concerns that a long-awaited budget later this month will fail to boost Britain’s growth prospects.
Options markets show that sentiment towards sterling is the gloomiest since January, when UK government bonds came under pressure amid fiscal and monetary policy uncertainty.
Much of this reflects expectations that the Bank of England could cut interest rates, possibly on Thursday, a move that would lower returns for savers and investors, reducing demand for the currency.
Meanwhile, Finance Minister Rachel Reeves this week signaled potential tax rises in the November 26 budget, citing “hard choices” needed to keep Britain’s finances on track.
Although sterling is hovering around $1.305 — its weakest level against the dollar since April — and about 88 pence against the euro, near its lowest since 2023, these levels have not yet tempted investors to buy.
Markets now price a roughly 33% chance of a BoE rate cut this month, up from virtually zero a few weeks ago, with two additional cuts expected in the first half of 2026.
“We are still short the pound,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management, referring to a bearish bet on the currency. “Reeves seems wedded to a material tax rise, which will hurt growth.”
A fiscally tight budget designed to reassure bond markets but restrain economic activity could encourage more rate cuts.
“Reeves has a difficult tradeoff — fiscal tightening is a negative for growth, and confidence is low,” said Lloyds Bank currency strategist Nick Kennedy, who expects the euro to reach 90 pence in coming weeks.
After holding bullish positions on sterling for much of the year, investors’ optimism has waned as the outlook for the economy and interest rates has grown murkier. One-month risk reversals — a gauge of investor sentiment — have fallen to their lowest since January, signaling increased demand for protection against a weaker pound.
Despite the gloom, implied options volatility remains relatively subdued, suggesting limited demand for large-scale hedging. Analysts say this could reflect how UK officials often reveal policy details gradually, reducing the potential for sudden market shocks.
Still, if the budget turns out to be less restrictive than feared, the pound could recover in the longer term.
“I would view an ‘aggressive budget’ of tax hikes as sterling-negative from a BoE rates perspective,” said Derek Halpenny, head of research for global markets EMEA at MUFG. “But over time, if that is perceived as credible, it could ultimately support sterling.”
— Reuters
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