Traders are making pre-emptive moves on the indication Rachel Reeves’ forthcoming Autumn Budget will send the pound tumbling.
Investors have taken an overwhelmingly bearish view on the pound, with new trading data revealing the volume of put options – contracts that profit when sterling declines – surpassing call options, those that profit when the currency rises, by a drastic four-to-one ratio in the last week.
The imbalance marks a stark revelation that traders are bracing for a drop in the pound and betting against the currency.
The fresh research, according to CME group, comes ahead of Rachel Reeves second Autumn Budget on 26 November, where she is expected to inflict at least £20bn of taxes on the UK.
Richard Potts, economist at alternative banking firm Bondford, said: “With sterling trading near a seven-month low against the dollar, markets are bracing for a potentially pivotal UK Budget.”
Sterling had a volatile morning on Tuesday, falling against the dollar before clawing back 0.2 per cent to $1.313. But it remains down over one per cent in the last month.
It comes after tax fears have weighed on the currency on the road to the Budget.
As Reeves teased a manifesto-breaking rise to income tax, the pound fell 0.46 per cent to to its lowest since April against the dollar this morning at $1.30.
Pound hit by ‘leaky’ budget
Potts said the “unusually leaky” run-up to the Budget has heightened worries and provided a double-edged sword for markets.
“This approach can cut both ways,” he said.
“On the one hand, it reduces the risk of a nasty surprise that jolts sterling on Budget day.
“On the other, it risks signalling indecision and political fragility – especially if the final measures appear shaped by short-term push back rather than a coherent fiscal strategy. Traders will be alert to whether the final Budget feels like a carefully calibrated plan, or a reactive compromise shaped by polling and press headlines.”
George Vessey, macro strategist at cross-border payments firm Convera, said: “Markets are pricing the Budget as a genuine risk event – sterling hedging costs are back at six-month highs and the political risk premium in UK assets is front-and-centre.”
The second Budget from the Labour government has been touted as a “smorgasbord” of smaller tax hikes to collectively fill the gap in Rachel Reeves fiscal headroom.
With Reeves also poised to lift the two-child benefit cap and slash VAT from energy bills, some economists are expecting the total tax revenue of spending cuts required to reach £40bn.
But City figures have warned the Chancellor a “pick and mix” selection of taxes could dent economic growth and triggered a worrying reaction from markets.
John Godfrey, managing director for policy at TheCityUK told City AM: “We prefer to see a broad tax base rather than going into Woolworths and doing a pick and mix job on short term solutions.”