A look ahead
The UK Pound continues to be influenced by the gilt market and fiscal concerns. Sterling has been a very expensive short this year, contributing to its relative outperformance. In fact, the few episodes of sustained weakness we have seen tended to have either coincided with a global risk-off turn or a sharp drop in UK gilt prices. As the cost of servicing public debt rises, fiscal headroom decreases, creating a stability and growth risk for the UK economy and public finances.
The Chancellor announced the date of the next UK budget (26th November) well over a month ago now. Since then, GBP has remained relatively range-bound with key pairs more often being dictated by the counter currency than Sterling itself. Investors will be likely awaiting the contents of the Autumn budget before making significant decisions with respect to UK assets. A range-bound market is likely to endure therefore.
Options markets are pricing for significant disturbance on the 26th November. However, cast your mind back to recent UK Sterling routs and we’re reminded of elongated multi-session sell-offs. The Kwarteng-Truss mini budget of 23rd September 2022 for example saw a far more severe sell-off the session after the mini-budget, not on the day itself. The premium for options expiring in the sessions following the 26th November are not dissimilar in price to those expiring on budget-day itself. The conclusion being that the market could be caught off guard by a more protracted Sterling or gilt-market tantrum.
Discussion and Analysis by Charles Porter
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