A short lived short squeeze?
Sterling is undoubtedly benefitting from a short squeeze. Traders on net had increased positions that benefit from Sterling’s demise leading into the budget. Depending upon the participant’s persuasion, that could have meant gaining an outright short exposure to the currency or, in a more mild form, trimming any or all remaining positive exposure to the Pound. Ultimately, most would argue that from a market perspective the UK economy has emerged relatively unscathed from the fiscal event. This has left a vacuum for Sterling to appreciate into which it has done.
Gaining around a cent versus the Euro and more like two versus the US Dollar, the risk premium created by the budget is likely to be all but eliminated by now. So, given that Sterling is relatively expensive by longer term averages, could this short-term short-squeeze be over? The answer is yes, GBP is more than capable of moving lower once again. The catalyst for such an event may be just around the corner where the likelihood of a cut from the Bank of England on 18th December is building. As well as a pricing out of risk premium, GBP has been supported by the sheer cost of hedging against it. As rates move lower into 2026, that tailwind for Sterling will fade.
Looking ahead into the new year, 2026 is the year of supposed consolidated fiscal stimulus in Europe. The market remains cautious of any watering down of initiatives for tranches of debt repayable at the European versus national level. However, so long as all goes to plan, the Euro stands to gain immensely from such a trend. With the ECB’s cutting cycle now concluded for the foreseeable future, the Euro too will benefit from narrowing rate differentials as the remainder of the G10 normalise rates.
Discussion and Analysis by Charles Porter
Related Insights
Daily Brief – A week out
Charles Porter
Tue 2 Dec 2025
A week out Markets are now in their final few trading days ahead of a Fed blackout that will precede the Reserve’s decision next Wednesday. The US government shutdown, despite now feeling like a distant memory, continues to weigh on the Dollar and market pricing in general. In particular, as we approach the decision next […]
Daily Brief – The Hassett Trade
Charles Porter
Thu 4 Dec 2025
The Hassett Trade Not another one, I hear you say. So far this year we’ve seen bandied around the TACO trade, the Trump put, FOMO trade, the MEGA trade, surely there isn’t another to surface before year end?! Wrong. The so-called Hassett trade is that which is currently pushing the Dollar lower but coming to […]
Daily Brief – OBR: Oops, Budget Released
Charles Porter
Thu 27 Nov 2025
OBR: Oops, Budget Released Traders who might have been out grabbing a coffee ahead of the planned publication of the UK budget yesterday afternoon would have returned to chaos. Reuters, a popular financial news agency, revealed that although not directly discoverable via a link on their website, the OBR had published its report on Chancellor […]
